Description
Abstract: Foreign demand for Government of Canada (GoC) bonds has increased rapidly since the financial crisis. This sudden interest by foreigners in the GoC market is associated with external events, such as the implementation of quantitative easing (QE) by the Federal Reserve in 2008 and the euro crisis that began in 2010. More importantly, this foreign interest reflected Canada’s newly achieved status as a safe haven. Foreign purchases were large both by historical standards and relative to the market size of GoC bonds. We estimate that foreign purchases of approximately $150 billion of GoC bonds lowered the 10-year yield by 100 basis points between 2009 and 2012. We also show that the decline in yields was mainly the result of lower risk premiums rather than reduced expectations of future short-term interest rates.