A Conservative victory in next week’s federal election could affect the bond market, National Bank Financial suggests in a research note.

“The rising probability of a Conservative government in Ottawa will not go unnoticed on some key economic variables,” NBF says.

It notes that the Conservative pledge to reduce the GST by a full percentage point as soon as the next federal budget (with another full percentage point to follow over the next five years) would soon impact inflation data. “Given that about 90% of the CPI basket is subject to indirect taxes, this measure would reduce headline inflation by almost a full percentage point as soon as next spring,” it suggests.

“Current inflation expectations as measured by the spread between nominal and real return bonds are running at around 2.7%. In our opinion, this is way too high and paves the way for a temporary underperformance of real return bonds relative to conventional bonds in the coming months,” it predicts.