In a notable shift this week, U.S. government bonds have begun to recoup some of their earlier losses from the year, signalling a turn in the financial markets. Although, the cycle of decreasing rates remains fragile due to Jerome Powell’s hawkish tone. We're diving into the catalysts behind this trend and what it could mean moving forward.

Understanding the T-Bond Rally

This week's rebound is largely attributed to the decrease in long-term Treasury yields. Specifically, the 10-year yield saw a reduction of 14 bps, while the 30-year yield dropped by 17 bps. This movement comes as investors anticipate the Federal Reserve to cut rates within the year. However, Federal Reserve Chair Jerome Powell has moderated expectations for an immediate rate cut in March, citing persistent inflation over the Fed's 2% target. Despite this, the Federal Open Market Committee (FOMC) has acknowledged that the balance between achieving its employment and inflation objectives is improving. Additionally, Fed officials have stepped back from prior suggestions of a potential rate hike.

Effect on Canadian Long-Term Government Bond ETFs

The Canadian long-term government bond ETF sector witnessed a 3.00% increase, accompanied by $14 million in net inflows this past week. This performance stands in contrast to the wider government bond market, which saw a more modest gain of 1.68% and net outflows totalling $273 million.

Highlighting specific ETFs, the BMO Long Federal Bond Index ETF (ZFL), with assets of $3.3 billion, enjoyed a 3.20% upswing and net inflows of $9 million during the week. Another notable ETF, the TD Canadian Long-Term Federal Bond ETF (TCLB), reported a 2.78% increase in the same period.

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Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.