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Bank of Canada Rate Hike Signal Spikes Treasury Yields, Pressures Fed

Short-term U.S. Treasury yields leapt higher Wednesday after the Bank of Canada shut down its QE program and signaled for an early 2022 rate hike just days ahead of a crucial Fed policy meeting.

U.S. Treasury yields jumped higher Wednesday, pushing major stock indices into the red, after the Bank of Canada ended its bond-buying program and signaled an early interest rate hike amid surging commodity prices and stubbornly persistent inflation.

The Bank of Canada held its key lending rate unchanged at 0.25% following a policy meeting in Ottawa, but noted that inflation likely won't ease back towards its central target range of between 1% and 3% until at least late next year, thanks in part to "the larger and more lasting impacts from supply constraints as well as higher energy prices."

Rate hikes, the bank said, will likely occur in the 'middle quarters' of next year, around three months earlier than indicated in its July forecast. Quantitative easing, the Bank said, will end on November 1.

The BoC's view comes just days ahead of the Federal Reserve's November policy meeting, during which it is expected to begin slowing the pace of its $120 billion in monthly bond purchases - the first of several steps required to begin hiking rates next year.

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The extended inflation forecast also challenges comments from both Fed Chairman Jerome Powell, and Treasury Secretary Janet Yellen, both of whom has insisted that inflationary pressures will ease into the second half of next year.

Benchmark 2-year Canadian government bond yields jumped 25 basis points following the BoC statement, the biggest single-day move in a decade, taking U.S. Treasury 2-year notes to a 20-month high of 0.527% - more than double the higher-end of the Fed Funds target rate of 0% to 0.25%.

Benchmark 10-year note yields eased to 1.563%, pegging the difference between 2-year notes at just 104 basis points, the narrowest since the pandemic trough of April 2020, as investors reacted to both the BoC's reduction in growth forecasts and further signals of a weakening U.S. recovery into the final months of the year.

U.S. stocks gave back earlier gains as well, with the Dow Jones Industrial Average falling 95 points and the broader S&P 500 down 1 point.

A record high for Microsoft  (MSFT) - Get Microsoft Corporation Report, following its first-ever quarterly profit of $20 billion, as well as ongoing gains for Tesla  (TSLA) - Get Tesla Inc Report helped the Nasdaq hold onto a 55 point advance.