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CANADA FX DEBT-Canadian 2-year yield hits two-year high as BoC hikes interest rates

By Reuters News

By Fergal Smith

TORONTO, Oct 28 (Reuters) - Canadian bond yields rose on Wednesday and the loonie edged higher against its US counterpart as the Bank of Canada raised interest rates for the first time in more than three years.

  • The Canadian central bank hiked its key interest rate by 25 basis points to 2.50% and said further increases might be needed to prevent soaring energy costs from driving broader inflation.

  • "The initial reaction was delayed given the mixed tone of the meeting, but ultimately rates are moving higher and Canada is giving back the outperformance from this morning," strategists at TD Securities, including Andrew Kelvin, said in a note.

  • "The Bank of Canada has a tendency to move consecutively after a long pause, and we see a lower bar for a subsequent hike in December," the strategists said.

  • Investors see a 45% chance the central bank hikes further in December and have fully discounted a second hike by January, swap market data showed.

  • The Canadian 2-year yield rose as much as 7.2 basis points to touch its highest level since August 2024 at 3.441% before pulling back to 3.413%. The 10-year was up 2.4 basis points at 3.885%.

  • The loonie was trading 0.1% higher at 1.4035 per US dollar, or 71.25 US cents, after moving in a range of 1.4027 to 1.4068.

  • The Federal Reserve was also due to make a policy decision on Wednesday, with investors expecting the US central bank to leave its policy rate unchanged in a 3.75%-4.00% range.

  • The price of oil, one of Canada's major exports, rose as fighting in Yemen and an attack on a refinery in Saudi Arabia renewed concerns about additional supply disruptions from the Middle East. US crude futures were trading 3.1% higher at $102.98 a barrel.

  • Canada and the European Union agreed to ever closer association but dropped the contentious idea of associate membership in a draft statement seen by Reuters ahead of a summit hosted by Canadian Prime Minister Mark Carney in Montreal starting on Thursday.

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