Summary
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Since last fall, Canadian real return bonds have underperformed to the point of erasing all the excess returns generated since December 1999.
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With the global growth outlook having deteriorated in Q4, the risks for deflation are probably higher today than they were back during the deflation scare of 2002-03. Still, the Fed expects PCE inflation to remain positive within a range of 1% to 1.5% in 2010.
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The output gap in Canada is no where as big a threat as it is in the United States and growth forecasts are brighter this side of the border. Consequently, we see year-over-year Canadian headline inflation at 1.7% in January 2010. On that basis, RRBs today are beginning to offer some reasonable value.
