Canada 2-year yield plunges most since 1990s; rate bets shift

THE yield on short-term Canada bonds was on pace for the biggest two-day drop in more than 27 years, as investors bet the Bank of Canada will cut rates in coming months to counter fallout from the collapse of some regional banks in the US.

Canada’s two-year benchmark yield tumbled more than 41 basis points to 3.538 per cent as of 1.48 pm in Toronto, bringing its total decline since Thursday’s (Mar 9) close to about 61 basis points. The last time the benchmark dropped that much over two trading sessions was in October 1995.

Traders in overnight interest swaps are now pricing in 50 basis points of rate cuts from the Bank of Canada by July. Last week, traders were expecting the next move to be a hike.

The repricing comes as the collapse of regional US lenders Silicon Valley Bank and Signature Bank roils global markets.

“We believe financial stability concerns spilling over from the US is material enough to rethink the market reaction function in Canada,” Canadian Imperial Bank of Commerce fixed-income strategists Ian Pollick and Sarah Ying said on Monday in a report to investors.

“The danger now is that we see market overreaction to bad data into the months ahead as the market looks to be more sensitive to rallies — something we have yet to see this cycle.” BLOOMBERG