Among other things, this whipsaw in yields is being driven by:
Today’s stunning surprise with May inflation (At 3.7%, headline inflation is on its fastest pace since 2003. Although, some analysts see this as temporary given recent easing in commodity prices. Core inflation [which is more relevant for interest rate policy] also exceeded forecasts at 1.8%, just under the BoC’s 2% target.)
Improving odds of a Greek debt restructuring
Technical factors (Bond traders are taking money off the table after almost three months of aggressive buying.)
Rebounding equities (and asset allocation out of bonds)
As of yesterday, financial markets weren’t fully expecting a rate hike until spring 2012. Today’s news has brought those expectations closer. Overnight index swap traders are now pricing in a 60% chance of a December increase (up from 30% on Monday). We may also start hearing more economists become vocal in support of a fall rate move.
Be that as it may, CIBC economist Avery Shenfeld suggested today on BNN that the BoC will still need to see real sustained “demand” before lifting rates. A big spike in headline inflation, on its own, doesn’t justify removing liquidity from the system.