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Canada could be headed for negative yields, as quantitative easing begins

Stephanie Hughes
Financial Journalist
Canada could be headed for negative yields, as quantitative easing begins

The Bank of Canada’s secondary market purchase program seems to be working for the bond market, according to one analyst.

The central bank released details for the secondary market purchase of federal government securities on Tuesday, as part of a series of liquidity measures that include the country’s first-ever quantitative easing program. Canadian investors are beginning to see the effects play out.

“There has been a very positive reaction from the unprecedented program the Bank of Canada has introduced, especially in the money markets,” Joey Mack, the director of fixed income at GMP Securities, LP, told Yahoo Finance Canada. “The commercial paper market has opened back up with today’s purchases, and provincial spreads also narrowed after [Wednesday]’s activity.”

Mack explained that bid-ask spreads narrowed for the third day in a row Thursday, an impact that spilled over into longer term markets. Mack described new issuances and narrowing bid-offer spreads in corporate markets. He did cite some challenges: “Liquidity is still not great [and] it is tough to get bids.”

Despite the measures, Canada’s economic recovery will still depend on curbing the growth in new COVID-19 cases. “This is just the start,” Mack said, “I am hoping we hit bottom, but a lot will depend on flattening the COVID-19 curve.”

Canada’s first quantitative easing program is also expected to create a few other ‘firsts’ in Canada’s bond market, like a negative-yielding bond. “I think the yield curve can go lower and even into the negative territory,” said Hosen Marjaee, senior managing director at Manulife Investment Management, “The possibility is there further along the curve. And that depends on how the global economy and our own economy perform during the second quarter.”

Marjaee says Bank of Canada governor Stephen Poloz did not seem interested in taking the overnight interest rate into negative territory, even after the bank made two emergency cuts and its benchmark rate currently rests at 0.25 per cent. The measures taken so far could go a long way in pumping more liquidity into the markets, in his view.

The bank’s quantitative easing program began on April 1 with a series of five-year bond purchases totalling $1 billion, $800 million on Thursday across various maturities, and $1.25 billion across two-year ranges on Friday. The central bank has committed to purchasing at least $5 billion per week as part of the liquidity program.

Some bond ETFs like the iShares Core Canadian Universe Bond Index ETF (XBB) have shown steady gains over the course of the week, recovering from a sharp decline in mid-March. The broad market bond ETF holds a mix of shorter and longer term bonds.

If Canada’s bond yields were to run negative, it would not be the first. France, Germany, Spain, the Netherlands and particularly Japan, which held USD $4.8 trillion in government debt, have all gone negative. Japan’s quantitative easing experiments with negative bonds and interest rates stem back to its recession in the early 1990’s. The move failed to promote real economic growth over 25 years, according to analysis.

For now, the bank’s easing has kept the Canadian bond market moving along. “Are we entirely out of the woods?” said Marjaee, “I am not quite so sure about that, but definitely a good start towards recovery.”