Canadian government bonds are outperforming Group of Seven debt on a monthly basis for the first time this year as investors re-embrace the nation’s fiscal discipline and growth while Europe’s debt crisis worsens.

Canadian sovereign debt has climbed 1.9 per cent in May, after posting losses in the first four months of the year, and is returning double the amount of G-7 peers, according to Bank of America Merrill Lynch index data. The gain is the most since Canadian debt returned 1.97 per cent in September.

Canada missed out on a global bond rally in the first four months of the year as investors sought better returns in economies flooded with cheap funding from central banks in successive rounds of quantitative easing and longer-term refinancing operations by the European Central Bank. The Bank of Canada stood alone in contemplating a rate rise to cool the economy last month, a scenario traders have now discounted.

“The boring-is-beautiful bid is back,” said Ian Pollick, a fixed-income strategist at Royal Bank of Canada’s RBC Capital Markets unit in Toronto. “Other countries would be drooling to have the problems we have: inflationary pressures and a budget that will be balanced before any other advanced nation. Canada is seen as the international destination for safe-haven flows.”

Canada is working to eliminate its budget deficit and benefitting from a commodities-led boom that will push economic growth to 2.4 per cent this year, according to government estimates. Its ability to isolate itself from recession in Europe, European disarray and a global credit crunch four years ago attracted record investor inflows last year.

“Canadian bonds have looked good,” said Patrick O’Toole, a money manager who helps oversee $70 billion at CIBC Global Asset Management Inc. in Toronto. “Several large foreign investors have been caught short duration and are throwing in the towel. Their view was that the Bank of Canada would be hiking rates, and the reversal in that sentiment has caught them off guard.”

Canada’s budget deficit for the fiscal year that ended in March narrowed to $23.5 billion as revenue increased faster than program spending, the finance department said from Ottawa May 25. Finance Minister Jim Flaherty said the nation is “on track” to balance the budget in the next few years. The government projects it will run a surplus of $3.4 billion in the year beginning April 2015.

Among G-7 nations, Canada has the second-highest growth in gross domestic product after the U.S. and the lowest jobless rate after Germany and Japan. It’s one of three Group of 10 countries with a stable AAA rating from Moody’s Investors Service, Standard & Poor’s and Fitch Ratings. The others are Germany and Sweden.

Bank of Canada Governor Mark Carney said last month interest-rate increases may be necessary as growth and inflation outpace his earlier projections, and as slack disappears from the economy. RBC is forecasting the Bank of Canada will raise rates a quarter-percentage point in October.