Canadian bonds rallied with U.S. Treasurys Friday as renewed fears about the euro zone's debt crisis sent investors to safe-haven assets.
Yields for Canada's two-year bond were at 0.959% Friday, from 0.982% late Thursday. The 10-year bond was yielding 1.614%, from 1.656%, according to electronic bond trading platform CanDeal.
Yields for the 30-year bond were at 2.242%, from 2.275%.
Bond yields move inversely to bond prices.
Canadian bonds accompanied U.S. Treasurys on their sharp move higher Friday as investors grew worried about recent developments in Europe.
Even though euro-zone finance ministers approved Spain's bank bailout plan, concerns immediately shifted to the country's economic struggles. Amid efforts to cut spending and reduce debt, the Spanish government said it expects its economy to contract by about 0.5% next year.
The deepening recession in Spain, the fourth-largest economy in the euro zone, is hurting its government bond market and driving yields up. Spanish 10-year debt yielded 7.15% recently, a level many bond analysts say marks an unsustainable borrowing cost for the government in the long run.
"At the end of the day, there's just too much debt out there, and eventually they'll have to start to pay this stuff off," said Levente Mady, derivatives strategist at Union Securities in Vancouver.
Soft U.S. data and downgraded forecasts for growth there are underpinning bond markets, he said.
"As a result, Treasurys do better, and as a result of that, Canadas try and keep pace," Mady said.
In Canada, the front end of the yield curve benefited in early trading from news Canada's year-over-year core inflation was at 2.0% in June, shy of the expected 2.3% and in line with the Bank of Canada's inflation target of 2.0%.
Total annual inflation came in at 1.5%, short of the 1.7% the market was expecting.
Economists said the inflation data served as a positive for shorter-dated bonds Friday, but did not constitute a "game changer" for the market as the Bank of Canada adjusted its inflation forecasts lower in its policy report Wednesday.
"Note that the Bank of Canada became more dovish on the inflation outlook in its latest forecast, so it wasn't really factoring in near term inflation pressures as a reason for advocating the need for rate hikes down the road," said CIBC World Markets.