Yield Curves Flatten as Inflation Data Beats Expectations

Canadian government bond yield curves flattened sharply on Friday after Statistics Canada reported consumer price inflation of 3.2% year-over-year in February, exceeding the consensus forecast of 2.8%. The two-year/ten-year spread narrowed to 12 basis points, its tightest level since November 2024.

The hotter-than-expected inflation print sent the loonie lower against the US dollar, with USD/CAD rising to 1.3680, as traders repriced expectations for Bank of Canada rate cuts. Interest rate futures now imply a roughly 30% probability of a rate cut at the Bank's April meeting, down from 65% prior to the data release.

Core inflation measures were mixed. CPI-trim came in at 3.0% while CPI-median printed at 2.9%, both above the Bank of Canada's 2% target. Shelter costs remained the primary driver, with mortgage interest costs up 23.4% and rent up 8.2% year-over-year.