Lots of people know that bond yields influence fixed mortgage rates. But not so many know what influences bond yields.

There are actually countless factors and you could never list them all because some are random or can’t be anticipated (like the subprime catastrophe).

That said, the key bond drivers are inflation expectations and the supply/demand for Canadian treasuries. Those things hinge off of global economic performance (especially the performance of the U.S. economy), the risk and returns in other financial markets (like the stock market), the supply of new bonds, the Bank of Canada’s monetary policy, and the strength Canada’s economy.

Canada’s economic performance and inflation outlook are understandably paramount.  The common gauges of these things are Canada’s monthly and quarterly economic reports.

According to Ryan Brecht, Senior Economist at Action Economics, five reports affect government bonds the most, in this order…

1. Labour Force Survey – The key figures are:
   • Net Change in Employment
   • Unemployment rate
2. CPI Report – The key figures are:
   • Annual change in total CPI
   • Annual change in core CPI
3. GDP Report –– The key figure is:
   • Quarterly GDP
4. Retail Sales Report – The key figures are:
   • Monthly change in total retail sales
   • Retail sales excluding autos
5. Monthly Survey of Manufacturing – The key figure is:
   • Monthly change in manufacturing shipments

“Of course, a key caveat to this list is that Canadian data is never taken in isolation,” says Brecht. “The market tends to track the direction of U.S. Treasures, with spreads adjusting based on the Canadian data and other factors.”

Brecht’s point about the United States’ influence on Canadian rates cannot be understated. Bank of Canada research has found that:

“U.S. macroeconomic announcement surprises explain a substantial part of Canadian interest rate movements.”

That, of course, is because Canada’s fortunes are so tied to our southern neighbour.

In any event, if your goal is to be a bond market prophet, there’s a lot you have to follow.

Unfortunately, there are few on earth who can put all the puzzle pieces together and know where rates will be “x” months down the road…

(Chart data courtesy of Bank of Canada)

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Sidebar: Several other metrics also move bonds, especially when their readings surprise the market. Samples include Canada’s budget deficit/surplus, the Canadian Purchasing Managers Index, and Canadian International Merchandise Trade.

Last modified: April 28, 2014