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A file photo from the TMX Broadcast Centre in downtown Toronto in 2013.

Fernando Morales/The Globe and Mail

The Canada two-year bond yield Wednesday shot up to well above its U.S. equivalent after the Bank of Canada hiked interest rates, a reflection of changing perceptions about the course of monetary policy in the two countries.

For the last two years, bond investors had positioned for U.S. interest rates rising faster than Canadian rates, but those bets have now changed. Last week's stronger-than-expected gross domestic product report cemented views that interest rates will rise faster in Canada. At the same time, a slowdown in U.S. job creation and a continued tepid inflation outlook have prompted traders to pare back wagers the Federal Reserve will raise rates a third time this year.

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At midday Wednesday, the Canada government two-year bond yield was at 1.413 per cent while the U.S. yield was at 1.29 per cent.

The U.S. Federal Reserve is well ahead of the Bank of Canada on the tightening curve. It boosted rates in December, 2015, after laying dormant for seven years after the financial crisis. Three more increases later and the federal funds target rate stands at 1 per cent to 1.25 per cent. Canada first moved in July. Its overnight lending rate is now at 1 per cent.

With files from Bloomberg News

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