PrefBlog

Bonds got crushed today:

U.S. Treasury ‌yields hit their highest in around a year on Friday, two days after the government sold 30-year bonds at the highest yield since 2007, as traders anticipated the Federal Reserve would be forced to hike rates to rein in inflationary pressures stemming from energy shocks. Major global stock indexes were down between 1% and 2%, a day after the S&P ⁠500 and Nasdaq ​hit new highs.

The global move higher in bond yields extended into Canada, where both the five- and 10-year yields reached two-year highs, and were up more than 10 basis points. The moves suggest there will be more upward pressure on GIC and fixed mortgage rates in Canada in the days ahead.
…
Though the bond rout was sweeping the globe, ⁠many of the drivers were at least partly local in nature. UK gilt yields surged again, hitting their highest in decades, as pressure ⁠mounts on Prime Minister Keir Starmer to resign over his Labour Party’s hefty losses in local elections, and as challengers emerge.

Yields across the euro zone jumped, while Japanese bond yields hit record highs following a ​red-hot wholesale inflation reading this week that investors believe is likely to lead to rate increases from the Bank of Japan.

Italian 10-year bonds were among the worst performers, with yields up 11 basis points to around 3.89%, bringing the rise for the week to 16 bps, while benchmark German Bund yields rose almost 7 bps to around 3.12%, up 11 bps this week.

Equities noticed:

All three major U.S. stock indexes as well as Canada’s TSX veered sharply lower, each shedding more than 1% as a jump in benchmark Treasury yields, reflecting surging energy prices and ⁠concerns about long-term ​inflation, offered an attractive alternative to higher-risk equities.

Despite the selloff, the S&P 500 logged its seventh straight weekly gain, its longest since a nine-week streak ended in December 2023.

The S&P/TSX Composite Index, Nasdaq and the Dow fell on the week, with the Nasdaq snapping a six-week winning streak.
…
The odds of the Fed hiking interest rates by 25 basis points in December are approaching 40%, up from 13.6% a week ago, according to CME Group’s FedWatch tool.

The Dow Jones Industrial Average fell 537.29 points, or 1.07%, to 49,526.17, the S&P 500 lost 92.74 points, or 1.24%, to 7,408.50 and the Nasdaq Composite lost 410.08 points, or 1.54%, to 26,225.15.

The Toronto Stock Exchange’s S&P/TSX composite index ended down 434.92 points, or 1.3%, ​at 33,833.35, marking its lowest closing level since ‌May 5. For the week, the index lost 0.7%.

The Canadian 5-year bond yield, a key driver of Canadian mortgage rates, was up 11.6 basis points at 3.351%, ‌its highest closing ​yield since July ‌2024.

What a timely date for the Bank of Canada Staff analytical paper 2026-18 Distributing Sovereign Debt in a Rising Debt Environment: Outcomes from Canada’s 2024 Debt Distribution Framework Review by William Bradley and Jeffrey Gao to come out!

This paper documents Canada’s recent review of its sovereign debt distribution framework (DDF). Informed by a context of record-high debt issuance since the previous DDF review, along with comparisons with sovereign peers and insights from market participants, the review identified an important need to broaden Canada’s dealer base internationally to support a larger and more diverse set of investors. As a result, reforms to Canada’s DDF were recommended in 2024 and implemented in 2025. Key changes included revised dealer requirements to attract new international institutions to the non-Primary Dealer Government Securities Distributor (non-PD GSD) class, as well as simplification of auction rules, an increase in non-competitive bidding limits, and the introduction of a new reopening facility for off-the-run bonds.

… and further …

While the GoC and its peers have been issuing significantly more debt, the size of the dealer base has not kept pace.Between 2013 and 2024, the number of Canada’s primary dealers (PDs)—the firms committed to purchasing government securities at auctions and providing liquidity in the market—declined from 12 to 10. This reduction is due to several factors. In addition to dealers consolidating the number of jurisdictions in which they operate, banking regulations introduced after the 2008 financial crisis, such as Basel III and its Leverage Ratio, have strained balance sheets of the larger, bank-owned dealers and reduced the profitability of GoC bond trading.
This trend is common across many advanced economies (OECD 2025).

It is important to note that profits from trading GoC securities are not the only incentive for PDs to participate in primary and secondary GoC markets. Being a regular GoC dealer and liquidity provider is a prerequisite for members of syndicates for Canadian dollar (CAD) issuers and building ancillary customer relationships, which is how PDs generate most of their profits. Still, the declining returns from direct GoC securities activity have negatively affected the balance of dealer benefits and obligations, while also making it harder for new dealers to enter the market.
…
Rising hedge fund participation in sovereign debt markets is a global phenomenon. Epp and Gao (2025) find that, while GoC bond auctions have continued to be well-covered amid the increase to Canada’s debt stock, this can mostly be explained by the corresponding rise in hedge fund allocations—from about 5% to 40% over the past 10 years. The increased presence of hedge funds at auctions has heightened competition for government bonds, which in turn has helped keep Canada’s cost of funding low even as the volume of debt issuance has grown. With the dealer base experiencing limited growth, hedge funds have also assumed a greater role in secondary market intermediation, thereby contributing to market liquidity in normal periods (Sandhu and Vala 2023).

However, higher hedge fund participation brings certain risks. These firms, particularly international ones, tend to have higher attrition rates and less organic commitment to the Canadian market, making them more likely to exit abruptly. Their strategies often involve significant leverage through the repurchase (repo) market, which could pose financial stability risks (Bank of Canada 2024). During periods of market stress, such as the COVID-19 crisis, their trading activity may exacerbate one-sided markets, amplifying volatility—as observed by Sandhu and Vala (2023). With the share of dealer and real money investor participation at auctions declining, any decline or stagnation in hedge fund activity could quickly lead to noticeable deterioration in auction performance.
…
While all other sovereigns consulted have at least half their dealers based internationally, Canada has only one non-domestic dealer. This limited number of international dealers could mean greater exposure to a domestic shock and may constrain the development of Canada’s international client base—considerations that have become more important in an environment of higher debt issuance.

One factor limiting international dealer participation has been the requirement that all dealers be resident in Canada. Together with the requirement for CIRO membership, this has been cited as a significant hurdle for many prospective international dealers. Only two other DMOs consulted—both substantially larger than Canada—also impose an explicit requirement to be resident in their country.

… but, of course, if international dealers are allowed in, profits at Canadian dealers (effectively, Canadian banks) will decline. We can’t have that, not in our version of State Capitalism!

Another mortgage fund has run into liquidity problems:

Mortgage Company of Canada Inc. has temporarily halted redemptions for its residential lending fund as homeowners struggle to make their monthly loan payments amid the country’s housing downturn.

For more than a decade, the alternative mortgage lender has provided loans to homeowners in the Toronto region, which is one of Canada’s priciest real estate markets and an area where mortgage delinquencies have been rising faster than in the rest of the country.
…
Because of what it called adverse conditions, Mortgage Company said it has decided to temporarily halt redemptions and monthly distributions, and it will not allow investors to invest more.
…
Because MICs lend to borrowers who typically have a spottier credit history, their portfolios have a higher share of delinquencies, which is when a borrower misses a payment by at least 90 days.

Mortgage investment entities had a delinquency rate of 1.96 per cent in the third quarter of 2025, according to federal housing agency Canada Mortgage and Housing Corp. In comparison, chartered banks had a delinquency rate of 0.24 per cent in the same period.

CMHC said that, overall, mortgage investment entities have a higher exposure to Toronto, which may partially explain their worsening delinquency rate.

Mortgage Company did not disclose its delinquency rate in the investor notice or on its website.

The TXPR Price Index set a new 52-week high of 709.80 today, beating the old mark of 709.21 set yesterday (which I didn’t report. Sorry about that!)

So Kevin Warsh has been confirmed as Fed Governor:

Warsh was confirmed in a 54-45 vote, mostly split along party lines, with only Democratic Sen. John Fetterman of Pennsylvania crossing the aisle to vote in favor of Warsh’s nomination. It was the most partisan vote for a Fed chair nominee in history, underscoring the unease among Democrats with Trump’s fight against the Fed, though Republicans broadly welcome Warsh’s leadership.

Warsh is widely viewed as more aligned with President Donald Trump, who has long demanded rate cuts, but he is set to take office as inflation pressures intensify due to the US-Israeli war with Iran. Inflation jumped to a three-year high in April, according to the latest Consumer Price Index, and now outpaces wage growth.
…
The incoming Fed chief has proposed or hinted at reducing the size of the Fed’s $6.7 trillion balance sheet; coordinating more closely with the Treasury Department on the balance sheet; cutting back on the number of policy meetings each year from eight to as little as four; hosting fewer news conferences; shrinking the size of the Fed’s Washington-based workforce; and not providing frequent hints on the path of interest rates. According to JPMorgan analysts, all those changes would be within the remit of Warsh’s power as chair.

It was announced yesterday that US CPI jumped:

Prices rose 0.6% on a monthly basis, driving the annual rate to 3.8%, the highest since May 2023, according to the latest Consumer Price Index data released Tuesday by the Bureau of Labor Statistics.

Economists had expected prices to rise 0.6% from March and for the annual rate to climb to 3.7%.

Prior to the late-February US-Israeli strikes on Iran, inflation had eased to 2.4%. It leaped higher in March, and now, the energy price shock from the Iran war is further compounding longstanding affordability concerns for Americans weighed down by years of fast-rising prices.
…
Paychecks grew 3.6% from April of last year, on average; prices rose 3.8%.
…
Wealth inequality has widened in recent years. Lower- and middle-income households are experiencing increased strain and having a harder time keeping up and managing debt.

Separate data released Tuesday by the Federal Reserve Bank of New York showed increased rates of consumers becoming seriously delinquent on their loans, particularly their student loans.

… and today it was the PPI’s time to roar:

PPI, a measure of wholesale inflation, increased in April to 6% on an annual basis from 4% in March, well exceeding economists’ expectations. On a monthly basis, the index increased 1.4%, according to data released Wednesday by the Bureau of Labor Statistics. That’s twice the pace that economists expected. It’s also the second-largest monthly gain dating back to the index’s inception in 2010.

A 15.6% increase in gas prices accounted for 40% of the increase in prices businesses paid last month. That only looks to be getting worse with oil prices yet to reach their peak levels and global inventories falling at a record pace, according to a report released Wednesday by the International Energy Agency.

But the picture is still ugly for businesses even when excluding the volatile categories of food and energy. That measure, known as core PPI, rose 1% for the month, pushing the annual rate to 5.2%.

PerpetualDiscounts now yield 5.66%, equivalent to 7.36% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.06% on 2026-05-13. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has remained at the 230bp reported May 6.

The TXPR price index set a new 52-week high today of 708.07, eclipsing the old mark of 706.20 set on May 8. Canada five-year yields jumped 7bp to 3.19%.

Jobs, jobs, jobs!:

Job creation remained solid in April, as businesses shrugged off uncertainty brought on by the war in Iran and higher gas prices.

Employers added 115,000 jobs last month, surpassing expectations. The unemployment rate remained at 4.3 percent.

The jobs tally was taken in mid-April, as employers were still evaluating the impact of the war in Iran. If higher gas prices persist and consumers pull back more broadly to compensate, economists anticipate that could dampen job creation and lift the unemployment rate.

April was the second consecutive month of strong job growth, suggesting that the labor market could be breaking out of its monthslong low-hire, low-fire stasis. The March numbers were revised up modestly, to 185,000.
…

• Narrow growth: The labor market has become increasingly dependent on health care, which has powered job creation for months. The sector and related professions in social assistance added nearly 54,000 jobs last month, a substantial portion of total job growth. Other industries also added jobs, including transportation and warehousing, retail trade and leisure and hospitality.
• Hints of A.I?: Economists have been closely watching the information and professional and business services sectors for evidence that artificial intelligence is beginning to affect jobs. Although the technology has not yet led to widespread job losses, the April jobs report could stoke concerns. The information sector, which includes tech companies, lost 13,000 jobs last month, and finance slashed 11,000 jobs. Both sectors have announced high-profile layoffs recently.

…
Consumer sentiment in early May fell to its lowest level on record, according to the University of Michigan’s long-running survey. Consumers felt slightly more optimistic about the outlook over the next year, but more pessimistic about the current state of the economy and their own finances. Gas prices, which are now above $4.50 a gallon nationally, are continuing to weigh on household finances — about a third of survey respondents spontaneously mentioned high gas prices, and nearly as many brought up tariffs. Still, in encouraging news for Fed policymakers, consumers’ inflation expectations eased slightly, suggesting Americans haven’t yet lost faith in the central bank’s ability to keep a lid on price increases.

The TXPR price index set a new 52-week high today of 706.20, just barely ahead of the old mark of 706.17 set May 6. ZPR also set a new 52-week high. The Five-Year Canada yield was down 6bp to 3.12%.

The New York Fed released the updated survey of Consumer Expectations:

April Survey: Short-Term Inflation Expectations Rise at Short-Term, Remain Stable at Medium- and Longer-Term Horizons

• Median inflation expectations increased by 0.2 percentage point (ppt) to 3.6 percent at the one-year-ahead horizon and were unchanged at 3.1 percent and 3.0 percent at the three-year and five-year-ahead horizons, respectively, in April.
• Median year-ahead gas price growth expectations dropped sharply by 4.3 ppts to 5.1 percent from a spike in March.
• Median one-year-ahead earnings growth expectations increased by 0.3 ppt to 2.7 percent in April; however, mean unemployment expectations—or the mean probability that the U.S. unemployment rate will be higher one year from now—increased by 0.4 ppt to 43.9 percent, the highest reading of the series since April 2025.
• Perceptions about credit access compared to a year ago and expectations for future credit availability both deteriorated, while the average perceived probability of missing a minimum debt payment over the next three months decreased by 0.9 ppt to 11.4 percent, the lowest reading in more than two years.

On the other hand, the 10-Year TIPS/Nominals Break-Even Inflation Rate hit a three-year high:

[New York Fed President John] Williams in his Tuesday speech said inflation expectations remain “well anchored, despite the deluge of shocks.” Key surveys from the University of Michigan, the New York Fed and the Conference Board show that to be the case. Kashkari, one of the dissenters at last month’s Fed meeting, agreed in a statement on Friday, writing he’s “somewhat comforted by the fact that both market and survey measures of long-run inflation expectations appeared well anchored at our 2 percent target.”

But just on Tuesday, a market-based measure of long-term inflation expectations climbed to a three-year high. The 10-year inflation breakeven rate, which is the difference between the 10-year Treasury yield and the 10-year Treasury Inflation-Protected Security yield, reached 2.5%, the highest level since early 2023.

“The longer inflation remains above 2%, the greater the risk that it becomes entrenched in expectations, making it harder to achieve the (Fed’s) goal,” Fed Vice Chair Philip Jefferson warned in March, shortly after the Iran war broke out.

The TXPR price index set a new 52-week high today of 706.17, beating the old mark of 704.76 set yesterday. ZPR also set a new 52-week high.

PerpetualDiscounts now yield 5.68%, equivalent to 7.38% interest at the standard conversion factor of 1.3x. Long corporates yielded 5.06% on 2026-05-06. Therefore the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has narrowed to 230bp from the 240bp reported April 29.