COVID-19 effects on the Canadian term structure of interest rates

In Canada, COVID-19 pandemic triggered exceptional monetary policy interventions by the central bank, which in March 2020 made multiple unscheduled cuts to its target rate. In this paper we assess the extent to which Bank of Canada interventions affected the determinants of the yield curve. In particular, we apply Functional Principal Component Analysis to the term structure of interest rates. We find that, during the pandemic, the long-run dependence of level and slope components of the yield curve is unchanged with respect to previous months, although the shape of the mean yield curve completely changed after target rate cuts. Bank of Canada was effective in lowering the whole yield curve and correcting the inverted hump of previous months, but it was not able to reduce the exposure to already existing long-run risks.