Canadian Bond Market Surges on Quebec Election and Inflation Numbers

Strategic Insights -

Canadian bond traders were caught off guard by the Parti Quebecois's surprisingly strong performance in the Quebec election, which led to a significant surge in bond prices across the market. The unexpected outcome, coupled with news of a smaller-than-expected increase in U.S. consumer prices, sent bond yields plummeting. Mario Angastiniotis, senior economist with MMS International, noted that the market had factored in a 90-seat majority for the PQ, but instead saw the party secure 77 seats. This sudden shift in market sentiment led to a dramatic increase in bond prices, with some issues rising by as much as $1.50.

Key Takeaways:

  • The Canadian bond market experienced a significant surge in price due to the unexpected outcome of the Quebec election and the news of lower-than-expected U.S. consumer price inflation.
  • The Parti Quebecois's performance was stronger than initially anticipated, with the party securing 77 seats instead of the expected 90-seat majority.
  • Mario Angastiniotis, senior economist with MMS International, stated that the market had factored in a PQ majority, but the actual result caught bond traders off guard.
  • The rally in Canadian bonds started overseas and quickly spread to Toronto, with some issues rising by as much as $1.50.
  • The news of lower U.S. inflation rates also contributed to the surge in bond prices, as investors sought higher returns in the face of reduced inflation expectations.
  • The benchmark long government bond in the U.S. rose by 34 cents to 97 27/32, while the yield dropped to 7.68%.
  • Analysts noted that while the CPI numbers indicate reduced inflation pressures, it may only be a matter of time before price pressures reach the consumer level.

Statistics:

  • The dollar was quoted at 74.15 cents (US) in late trading, up 1.05 cents.
  • The long bond, the 8-per-cent Canada due June 2023, rose by $1.30 to 89.90, with its yield dropping to 8.99%.
  • The bellwether long bond opened at 74.34 cents (Canadian) and rose to 75.34 cents.
  • Other issues rose as much as $1.50 in price, with the longest-dated bonds performing the best.
  • In the U.S. bond market, the 7.5-per-cent, 30-year Treasury closed up 34 cents to 97 27/32, while the yield dropped to 7.68%.

Sources:

  • "Canadian Bonds" article in The Globe and Mail, dated September 14, 1994
  • Quotations provided by RBC Dominion Securities
  • Interview with Mario Angastiniotis, senior economist with MMS International
  • Article in The Wall Street Journal, dated September 13, 1994
  • Benchmark International Bonds data