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Bond prices surged higher and yields plunged in March as central bankers globally signalled their concern about slowing growth. Various central banks indicated that they would pause in their respective monetary tightening programmes and, while none of them hinted at future rate reductions, investors chose to anticipate interest rates would fall from current levels rather than rising. Economic growth remained positive in most countries, including Canada and the United States, but the recent deceleration in growth was expected by bond investors to continue and potentially lead to a recession. The sharp drop in bond yields that resulted was likely exacerbated by short covering as investors who had been defensive and had to buy bonds to prevent further underperformance. The FTSE Canada Universe Bond index returned 2.35% in March.
Canadian economic data received in March was mixed. Early in the month, we learned that the Canadian economy was weaker than realised in the final quarter of last year, growing at an annual rate of only 0.4%. Reinforcing this sobering news was the capacity utilization rate falling in the same period from 82.8% to 81.7% because of weakness in the manufacturing sector. We also learned that housing starts in February were weaker than expected, but poor weather was likely a contributing factor. On the positive side, the labour market remained quite healthy as the unemployment rate held steady at 5.8%, as robust job creation offset a rise in the participation rate from 65.6% to 65.8%. The rise in the participation rate itself was positive because it suggested discouraged workers were returning to the labour force. Inflation was slightly higher than forecasts, rising to 1.5% from 1.4% the month earlier. In addition, at month end, Canadian GDP growth for the month of January was revealed to be +0.3%, much better than expectations. Finally, the federal government issued its last budget before the expected October election. It had lots of spending initiatives to potentially attract votes, but little impact on the bond market.
The Bank of Canada surprised no one by leaving its interest rates unchanged at its March 6th meeting and by indicating that it was going to be data-dependent for the next several months. The market’s consensus was that the Bank would not raise rates again this year, and the rally over the balance of the month pushed bond yields well below the Bank’s 1.75% overnight target rate, which indicated rate cuts were thought possible.