Inflation and Interest Rates: What’s Next?
We subscribe to the lower-for-long thesis, however we would be remiss not to acknowledge the fixed income sell-off that began the year. Longer term rates were gradually moving higher in the latter half of 2020, but gained momentum as the year rolled-over and focus turned to policy rates normalizing sooner than expected.
To provide context, the 10-year Government of Canada (GoC) bond yield touched a brief low of 0.43% on August 4, 2020 before gradually rising to 0.68% on December 31, 2020. Over the first quarter of 2021, the 10-Year GoC yield climbed to 1.56%, a change of 0.88%. Over this period, the Bank of Canada has held its Overnight Policy Rate at 0.25% and has not diverged from its message that policy rates should be expected to be on hold until there is a clear path to a sustainable recovery. But the market seems to have a different view.