The US president says he'll impose blanket tariffs on Canadian goods on February 1. How is the bond market reacting?
Photo: Gage Skidmore, CC BY-SA 3.0, via Wikimedia Commons
It’s perhaps the biggest single imponderable facing Canada’s economy for the year ahead: the looming prospect of US-imposed tariffs, and the question of whether President Donald Trump is serious about putting big duties in place on Canadian goods crossing the border.
Five-year Government of Canada bond yields, which lead fixed mortgage rates, have slid lower over the past two weeks amid gathering economic storm clouds and warnings about the dire effect Trump’s threatened blanket 25% levy could have on the Canadian economy.
Trump says he’ll introduce the tariffs on February 1 alongside similar measures against Mexico. But while that might account for some of the recent bond market gloom on the economic outlook, there may be lessons to learn from the real estate tycoon’s first stint as president.
A bumpy ride is ahead for the bond market this year – but Trump showed during his 2017-21 presidency that he’s no stranger to brinkmanship and grandstanding, according to TMG The Mortgage Group agent Ryan Sims.
“This year is going to remain pretty volatile because bond markets are going to react to every single word that Donald Trump says – and I think if we learned one thing from the first Trump administration, it was that what he initially says is probably the only thing guaranteed to not happen,” he said.
“I think that example will be played out several times in the coming weeks where Trump goes in like a bull in a china shop and markets react instantly if they’re open, or even the futures market if they’re closed. But then common sense and cooler heads prevail, and things aren’t as bad as we think.”
Bekim Merdita from Rocket Mortgage Canada explains how the US leads with a strong secondary mortgage market, urging Canada to boost liquidity and competition. https://t.co/67B98QrQTH#MortgageMarket
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 23, 2025
How severe might Trump’s tariffs on Canada be?
That’s not to say tariffs definitely aren’t coming at the beginning of February. Canada has already primed countermeasures against the US if that threat comes to pass, but much of the bond market’s response will depend on how closely Trump sticks to the proposed figure of 25%.
“I think there will definitely be tariffs on February 1,” Sims said. “I think the question remains: What will they look like? How much will they be, and will there be any carveouts for them? Will this be blanket across the board – everything gets a tariff – or will it be, ‘We’re going to carve out oil, we’re going to carve out gas, we’re going to carve out lumber, just [charge] everything else’?
“Markets are a forward pricing mechanism and so they’re going to start repricing, but the market has to wait to see what those tariffs will be before it can start repricing anything. Because right now there are just so many potential outcomes. If it’s 25% across the board, that’s going to be a lot different than 10% on some sectors. The bond market is not going to be able to price it until it knows what it’s looking at.”
Five-year government bond yields were perched just above 2.9% at time of writing, down from around 3.29% barely two weeks ago. But Sims said despite the economic uncertainty that’s shrouded the beginning of 2025, he expects those yields to remain around the same level they started the year at, with some new lows and highs in the meantime.
Will an inflation spike follow Trump’s tariff plans?
As for this week’s Bank of Canada decision? Markets continue to expect a 25-basis-point cut tomorrow as signs grow of a weakening economy and easing labour market tension.
While both the Canadian and US central banks will closely watch to see whether an upcoming tariff war could prove inflationary, Sims also highlighted the possibility of a trade spat actually lowering the inflation rate.
“Canada is allegedly going to reciprocate with dollar-for-dollar tariffs, the whole point being that Canadian consumers, instead of buying an American product, buy a Canadian product,” he said. “That may not be as inflationary as we think.
“And we don’t know how the bond market will read that. They might say that prices are up in the US and that’s inflationary, so rates have to go up. They may also say yes, it’s kind of inflationary – but it’s for a justified reason that we can control and turn on and turn off if needs be, so it’s not a big deal. I don’t know which way the bond market is going to see that.”
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