Canada’s 10-year government bond yield retreated to 3.45%, down from the two-year high of 3.7% reached on May 19th, mirroring declines in US yields as fears of persistently high inflation eased alongside falling energy prices. The US and Iran signaled they were moving closer to an agreement to end the conflict and restore energy supplies from this key producing region. Although renewed strikes tempered optimism over a final deal, the decline in energy costs was consistent with the Bank of Canada’s view that elevated energy prices are unlikely to spill over meaningfully into core inflation.
Reinforcing this stance, the latest inflation data showed that the Bank of Canada’s preferred core inflation measures slowed more than expected, reaching their lowest levels in five years. As a result, GDP is now expected to have been essentially flat in the first quarter, further strengthening the case for lower interest rates.