The recent decline in Government of Canada bond yields is consistent with market participants revising down their longer-term expectations of the future path of the overnight policy interest rate. Rather than being triggered by domestic factors, however, the decline in longer-term rates appears to reflect developments in global bond markets. While there are several potential explanations for this, the precise reason is unclear. For the time being, the implications for Canada's economy are slightly positive, given the boost it will provide to the already overheated housing market. But we are convinced that this will only delay the day of reckoning for Canada's housing bubble and domestic economy, particularly as we expect global bond yields to rebound soon.
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