Monday Market Minute | Jun 19, 2023

Bond market volatility spikes as rate path uncertainty reaches a 2023 high

What Moved

The aftermath of the June 7 surprise hike sent Canadian bond markets into a repricing cycle. The 5-year Government of Canada bond yield breached 4.0%, its highest level since 2007. Swap markets began pricing in a meaningful probability of a further hike at the July meeting, with some analysts calling for a terminal rate of 5.00% or higher. The MOVE index — the bond market's equivalent of the VIX — remained elevated as fixed income traders wrestled with a rate path that had proven far less predictable than anticipated.

Why It Matters

Bond volatility directly affected private markets through the cost of capital channel. Private credit deals that used bond benchmarks for pricing saw immediate adjustments. Mortgage rates jumped, with the 5-year fixed surpassing 5.5% — further stressing borrower qualification. For private markets investors, the volatility was a reminder that interest rate risk was the dominant portfolio factor in 2023. Strategies with floating-rate exposure and short duration were structural beneficiaries of the uncertainty.

Signal to Watch

The Fed's parallel tightening path and any divergence between BoC and Federal Reserve terminal rates would influence the Canadian dollar and cross-border capital flows into Canadian private markets.

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