|In an unprecedented move, bond yields are spiking around the world. Yields globally are now at levels last seen before the coronavirus spread worldwide. At the same time, commodity prices are surging, including energy, metals and minerals, agricultural products and lumber. The Biden administration’s $1.9 trillion stimulus package is has triggered fears that if the US economy returns to full employment too quickly, inflation might be the result.
Central banks have attempted to soothe markets, with European Central Bank chief economist Philip Lane saying the institution can buy bonds flexibly. Fed Chair Jerome Powell called the recent run-up in yields “a statement of confidence” in the economic outlook. Bank of Canada Governor Tiff Macklem told us earlier this week that it’s a long road to recovery for the Canadian economy. The Bank of Canada will continue to provide support every step of the way. Many Bay Street economists took this to mean that he reinforced the BoC’s commitment to keeping the policy rate at its effective lower bound of 25 bps until sometime in 2023.
These global developments have sideswiped Canada. On Tuesday, I warned that the 5-year government bond yield had risen 27 bps to 0.69% since the beginning of this month, shown in the first chart below. This morning, the rise has become exponential, hitting 1.00%, shown in the second chart.