Education: Bond Yields?

Bond yields are interest rates — the market rate for that maturity. Policy rates (Fed/BoC overnight) are the short end; bond yields are the rest of the curve. (*) See below

How they connect

• Policy rate ↑ → short yields rise first; longer yields follow if markets expect the hike to stick or inflation to stay hot.
• Bond yields ↑ first (oil shock, strong data, deficit fears) → markets price more future hikes. That forces the Fed/BoC to stay tight or hike, even if they wanted a pause.
• Last week: US 10y >5% (highest since 2007) + Canada 10y ~4.0% = market saying “another hike is coming.” That is what hit the TSX.

What rising yields actually do

Channel	Effect
Mortgages / loans	New fixed rates reprice off the 5y/10y. Existing floating rates lag until reset.
Banks	Funding cost ↑; loan demand ↓; bond books marked down. High valuations make this worse (why CM/RY/TD sold off Sep 23).
Corporates	Debt rollover more expensive → capex and buybacks slow.
Equities	Higher discount rate on future cash flows. Long-duration names (tech, growth, utilities) get hit first.
CAD / inflation	Higher CA yields support CAD if purely domestic; last week CAD slipped because US yields rose more and oil/geopolitics dominated.

Last week’s loop (the one on your chart)
Oil ↑ → inflation scare → US 10y to 5%+ → Canada 10y to ~4% → banks + miners sold → TSX −584 pts.
Fri bounce = oil eased on Hormuz-deal talk → yields pulled back a bit → banks bounced.

Rule of thumb: a 25–50 bp jump in the 10y, if it holds, is roughly one extra hike priced in. That is a tightening of financial conditions even before the central bank moves.

(*) Two different rates, one curve.

1. Policy rate (short end)
Overnight rate set by the Fed or BoC.

• Fed funds / BoC target: the rate banks charge each other overnight.
• Directly controlled. Changed at meetings (hike, hold, cut).
• Anchors the left side of the curve: overnight → 1-month → 3-month bills.

2. Bond yields (the rest of the curve)
The interest rate the market demands to lend to the government for 2, 5, 10, 30 years.

• Not set by the central bank. Set by buyers and sellers of bonds.
• If you buy a 10-year Canada bond at a price that implies 4%, that 4% is the 10-year interest rate.
• Same for US Treasuries.

How they fit together (the yield curve)

Overnight   3m    2y     5y     10y    30y
  │         │     │      │      │      │
  BoC/Fed   bills  notes  notes  bonds  bonds
  (policy)  ←———— market-determined —————→

• Left = policy.
• Right = market’s forecast of future policy + inflation + term premium (extra pay for locking money up longer).

Why they move together — but not 1-for-1

• Hike expected → 2y yield jumps first (it is almost a bet on the next few meetings).
• Inflation/oil/deficit scare → 10y and 30y jump even if the overnight rate has not moved yet. That is higher long-term interest rates.
• Last week: Fed/BoC had not hiked that day. The 10y did. So market rates rose before the official rate did.

Simple version
Policy rate = what the central bank charges tonight.
Bond yield = what the market charges to lend for years.
Both are interest rates. The curve is just those rates lined up by maturity.