As the economic landscape continues to shift following Donald Trump's election, Canadian bond yields have diverged from global trends, remaining below 3.5% since July 2024. In contrast, the U.S. 10-year Treasury yield has surged to around 5%, while the UK yield approaches 5%, marking the highest levels since 2008 [b620236a]. Analysts attribute this divergence to the anticipated tariffs that Trump's administration is expected to impose on Canadian goods, which could significantly harm economic growth in Canada [b620236a].
However, on January 21, 2025, U.S. Treasury yields fell to 4.53% as fears of inflation eased following Trump's decision to refrain from imposing tariffs specifically on China. This decision has led to a temporary rally in U.S. Treasuries [e4fd7e74]. Although he declared immigration and energy emergencies, he only briefly mentioned tariffs, directing agencies to investigate trade deficits [a7c17dfe]. Trump hinted at potential 25% tariffs on imports from Canada and Mexico, possibly starting February 1, which has left investors cautious about future economic implications [a7c17dfe].
In response to these economic pressures, the Bank of Canada cut interest rates by 0.5% in both October and December 2024, aiming to mitigate the impact of rising tariffs and slowing immigration on the economy [b620236a]. This monetary policy shift reflects concerns over the potential for a recession as the Canadian economy grapples with the implications of U.S. trade policies. Alberta Premier Danielle Smith has voiced strong opposition to the looming U.S. tariffs, warning that they may not include exemptions for oil, further complicating the economic outlook [b620236a].
The political landscape in Canada has also been affected, with Prime Minister Justin Trudeau announcing his resignation on January 6, 2025, amid growing dissatisfaction with the government's handling of economic challenges [b620236a]. This leadership change adds another layer of uncertainty as the country navigates the complexities of its relationship with the U.S. and the potential fallout from Trump's policies.
As the situation develops, experts are closely monitoring the implications of Trump's tariff decisions on both U.S. and Canadian economies. Analysts have warned that even a measured tariff approach could raise inflation concerns, impacting Federal Reserve policies, which now project only two rate cuts in 2025, down from four, due to inflation worries linked to Trump's policies [a7c17dfe]. UBS's Mark Haefele predicts that 10-year yields could drop to 4% by mid-2025, indicating a potential easing of inflation pressures [e4fd7e74]. The divergence in Canadian bond yields compared to global markets underscores the unique challenges Canada faces as it contends with the ramifications of U.S. tariffs and a shifting economic environment [b620236a].