{"id":61873,"date":"2025-07-14T12:01:09","date_gmt":"2025-07-14T12:01:09","guid":{"rendered":"https:\/\/www.pantheregroup.com\/2025\/07\/14\/posthaste-this-shift-in-canadas-bond-market-is-raising-red-flags\/"},"modified":"2025-07-14T12:01:09","modified_gmt":"2025-07-14T12:01:09","slug":"posthaste-this-shift-in-canadas-bond-market-is-raising-red-flags","status":"publish","type":"post","link":"https:\/\/www.pantheregroup.com\/2025\/07\/14\/posthaste-this-shift-in-canadas-bond-market-is-raising-red-flags\/","title":{"rendered":"Posthaste: This shift in Canada's bond market is raising red flags"},"content":{"rendered":"

\n

\n\"\"<\/p>\n

There\u2019s been a shift in <\/p>\n

Canada\u2019s bond market<\/p>\n

and it\u2019s raising red flags with some observers. <\/p>\n

As the Government of Canada bond market expands, <\/p>\n

hedge funds<\/p>\n

are grabbing a bigger share. <\/p>\n

In recent auctions, these funds bought nearly half of the bonds available in some maturities, and took a 30 per cent share of secondary trading, said a report by Moody\u2019s Analytics. <\/p>\n

In 2010, hedge funds purchased less than 2 per cent of these bonds at auction. <\/p>\n

\u201cHedge funds are now at the core of the Government of Canada bond market,\u201d said Moody\u2019s Analytics economist Charles Houston. <\/p>\n

\u201cThis shift in market structure has important consequences for financial stability.\u201d <\/p>\n

\"<\/p>\n

One reason for the increase in hedge fund buying is that the Government of Canada has issued more bonds, with the value rising by more than 60 per cent since the start of the pandemic, says Moody\u2019s. <\/p>\n

Bank-owned dealers, who used to be the main buyers, have not been able to absorb the higher issuance because of their capital constraints and risk management policies. <\/p>\n

\u201cHedge funds have stepped in to fill the gap,\u201d he said. <\/p>\n

Where the vulnerability lies is that hedge funds tend to use a strategy called cash-futures basis trade, which involves buying a bond in the cash market and selling a futures contract tied to that same bond. <\/p>\n

These transactions are often financed through short-term borrowing in the repurchase (repo) market and their popularity is growing. <\/p>\n

Volumes linked to this strategy hit $51 billion in April 2024, almost 10 per cent of the government of Canada bond market, according to the <\/p>\n

Bank of Canada<\/p>\n

. <\/p>\n

When the bond market behaves predictably, the strategy works well, especially when trades are scaled up by borrowing. But when it doesn\u2019t, things can go very bad, very quickly. <\/p>\n

If bond volatility spikes, margin calls can increase and banks cut back on funding hedge funds\u2019 positions, said Moody\u2019s. Funds are then forced to quickly unwind their trades, swamping the market, and yields rise. <\/p>\n

This vulnerability blew up in March 2020 in the <\/p>\n

U.S. Treasuries market<\/p>\n

when foreign central banks and bond funds dumped their Treasuries in a \u201cdash for cash.\u201d <\/p>\n

The <\/p>\n

Federal Reserve<\/p>\n

was forced to step in, <\/p>\n

buying more than US$1 trillion in Treasuries<\/p>\n

in just one month. <\/p>\n

More recently, it was seen in early April of this year, just days after <\/p>\n

Donald Trump\u2019s Liberation Day<\/p>\n

roiled the stock market. <\/p>\n

In a highly unusual situation, bond yields surged as stocks dropped, and the Treasuries basis trade was named as one of the big culprits. <\/p>\n

The Bank of Canada identified cash-futures basis trade as a potential risk <\/p>\n

in a 2024 report<\/p>\n

that calculated that trading volumes in this strategy had more than doubled since 2016. <\/p>\n

\u201cWhile basis trades help to maintain an efficient government bond market, they can also amplify market stress,\u201d said the report. <\/p>\n

\u201cGiven the potential implications for financial stability, Bank of Canada staff will continue to monitor the size of the trade and the types of investors that participate in it.\u201d <\/p>\n

\n

\u00a0Sign up here to get Posthaste delivered straight to your inbox.<\/strong><\/em> <\/p>\n

\n


\"\"<\/strong> <\/p>\n

\"<\/p>\n

Trump\u2019s trade war has unleashed a tsunami of uncertainty on the world, as shown by this chart from National Bank of Canada tracking the volatility measures, VIX and Bloomberg Global Trade Policy Uncertainty Index, against the United States\u2019 effective tariff rate. <\/p>\n

\u201cTo be frank, the future of U.S. trade policy is as clear as mud,\u201d said Avery Shenfeld, chief economist at CIBC Capital Markets. <\/p>\n

However, \u201camidst all the noise, there\u2019s been one point of consistency: no country is getting a \u201cget out of tariffs free\u201d card from the U.S.\u201d <\/p>\n

\n

\"\"<\/p>\n

    \n
  • U.S. trade issues will be in focus this week after U.S. President Trump threatened to impose a 35 per cent tariff on Canadian goods last week. Canada and the U.S. are working toward a trade agreement by an Aug. 1 deadline.<\/li>\n
  • Today\u2019s Data:<\/strong> Canada wholesale trade for May<\/li>\n
  • Earnings:<\/strong> PrairieSky Royalty Ltd., Fastenal Co.<\/li>\n<\/ul>\n

    \"\"<\/strong> <\/p>\n

    \"<\/p>\n

    <\/figure>\n
    \n

    \"\"<\/strong> <\/p>\n

      \n
    • Trump\u2019s new tariff threat hikes uncertainty for Canadian businesses <\/li>\n
    • Are Canadian home prices about to roll over? Don\u2019t bet the house on it<\/li>\n
    • Why was Jersey Milk cut from Canada and could other chocolate makers follow?<\/li>\n<\/ul>\n

      \"\" <\/p>\n

      Once the black sheep of personal finance, reverse mortgages are now lower cost than in the old days, and far more mainstream. In fact, a 2023 Deloitte study found that 17 per cent of soon-to-retire homeowners were ready to tap their home equity to bridge a savings shortfall. Find out what you need to know about reverse mortgages and the best rates, <\/p>\n

      updated daily here. <\/p>\n

      \n

      Send us your summer job search stories<\/h2>\n

      Recently, we published a feature on the <\/p>\n

      death of the summer job<\/p>\n

      as student unemployment reaches crisis levels. We want to hear directly from Canadians aged 15-24 about their summer job search. <\/p>\n

      Send us your story, in 50-100 words, and we\u2019ll publish the best submissions in an upcoming edition of the Financial Post. <\/p>\n

      You can submit your story by email to <\/p>\n

      fp_economy@postmedia.com<\/p>\n

      under the subject heading \u201cSummer job stories.\u201d Please include your name, your age, the city and province where you reside, and a phone number to reach you. <\/p>\n

      \n
      Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you starting out or making a change and wondering how to build wealth? Are you trying to make ends meet? Drop us a line at\u00a0<\/span>wealth@postmedia.com<\/span>\u00a0with your contact info and the gist of your problem and we\u2019ll find some experts to help you out while writing a Family Finance story about it (we\u2019ll keep your name out of it, of course).<\/span><\/div>\n
      \n

      McLister on mortgages<\/h2>\n

      Want to learn more about mortgages? Mortgage strategist Robert McLister\u2019s <\/p>\n

      Financial Post column <\/p>\n

      can help navigate the complex sector, from the latest trends to financing opportunities you won\u2019t want to miss. Plus check his <\/p>\n

      mortgage rate page<\/p>\n

      for Canada\u2019s lowest national mortgage rates, updated daily. <\/p>\n

      \n

      Financial Post on YouTube<\/h2>\n

      Visit the Financial Post\u2019s <\/p>\n

      YouTube channel<\/p>\n

      for interviews with Canada\u2019s leading experts in business, economics, housing, the energy sector and more. <\/p>\n

      \n

      Today\u2019s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.<\/em> <\/p>\n

      Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at\u00a0<\/p>\n

      posthaste@postmedia.com<\/p>\n

      . <\/p>\n

      \n
        \n
      • Canada’s mortgage renewal wave close to cresting<\/li>\n
      • It’s summertime and the season is ripe for a market meltdown<\/li>\n<\/ul>\n

        Bookmark our website and support our journalism:<\/strong> Don\u2019t miss the business news you need to know \u2014 add\u00a0financialpost.com\u00a0to your bookmarks and sign up for our newsletters here<\/em> <\/p>\n

        <\/img>
        \n
        \n
        Posthaste: This shift in Canada's bond market is raising red flags<\/a>
        \n
        2025-07-14 12:01:09<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

        There\u2019s been a shift in Canada\u2019s bond market and it\u2019s raising red flags with some observers. As the Government of Canada bond market expands, hedge funds are grabbing a bigger…<\/p>\n","protected":false},"author":2,"featured_media":61874,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[31],"tags":[],"class_list":["post-61873","post","type-post","status-publish","format-standard","has-post-thumbnail","category-economy"],"_links":{"self":[{"href":"https:\/\/www.pantheregroup.com\/api\/wp\/v2\/posts\/61873","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.pantheregroup.com\/api\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.pantheregroup.com\/api\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.pantheregroup.com\/api\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.pantheregroup.com\/api\/wp\/v2\/comments?post=61873"}],"version-history":[{"count":0,"href":"https:\/\/www.pantheregroup.com\/api\/wp\/v2\/posts\/61873\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.pantheregroup.com\/api\/wp\/v2\/media\/61874"}],"wp:attachment":[{"href":"https:\/\/www.pantheregroup.com\/api\/wp\/v2\/media?parent=61873"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.pantheregroup.com\/api\/wp\/v2\/categories?post=61873"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.pantheregroup.com\/api\/wp\/v2\/tags?post=61873"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}