Don’t Worry About Canada Bond Taper Tantrum, CIBC Says

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The Bank of Canada may be forced to wind down its bond purchases next year because its holdings are getting too large, but don’t expect the move to drive up domestic borrowing costs.

That’s the conclusion of analysts at Canadian Imperial Bank of Commerce, which released a study Thursday that found the central bank’s quantitative easing program hasn’t been a major driver of falling long-term Canadian yields this year.

Cuts to short-term policy rates, along with falling global borrowing costs, have had a bigger impact on longer-term Canadian yields, CIBC’s Royce Mendes and Ian Pollick said in the research paper. That means the expected wind down of bond purchases next year shouldn’t drive up interest rates in Canada too much, they said.

“There likely won’t be a Made-in-Canada taper tantrum,” Mendes and Pollick said.

The Bank of Canada is currently buying at least C$4 billion ($3.1 billion) in federal government bonds a week, and already owns about 30% of all outstanding securities.

CIBC estimates the bank will need to reduce its purchases early next year if it wants to avoid owning more than 50% of outstanding government bond, a threshold Governor Tiff Macklem has flagged as potentially problematic. That may force it to temper purchases, even if it doesn’t want to draw down stimulus.

The good news is Canada will be able to rely on stimulative policies elsewhere to keep domestic rates in check.

“It’s very likely the central bank will need to pull back on purchases before the midway point of 2021 for reasons other than those tied to achieving its inflation target,” the analysts said. “A taper shouldn’t lead to a severe tightening in domestic financial conditions, particularly if other, larger central banks maintain their purchasing volumes.”

The flip side is Canada won’t have the ammunition to resist any global increase in borrowing costs, they said.

©2020 Bloomberg L.P.

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