Foreign Flows and Their Effects on Government of Canada Yields
Foreign investment flows into Government of Canada (GoC) bonds have surged since the financial crisis. Our empirical analysis suggests that foreign flows of $150 billion lowered the 10-year GoC bond yield by 100 basis points between 2009 and 2012. In addition, foreign outflows largely accounted for the 70-basis-point rise in the 10-year yield around the U.S. “taper tantrum” in mid-2013. Our analysis suggests that foreign investment flows mostly reduced bond risk premiums rather than lowering expectations of future short-term interest rates.