Setting aside the sudden bout of euphoria that followed the US election in late 2016, the Canadian curve has flattened steadily going to back to mid-2013, explains the research team at TDS.
“Going forward, we will begin to test the plausible lower bound for flatteners in an economy with policy rates well below neutral. Risk/reward and carry considerations both favour holding steepeners. We like 3s7s steepeners, owning 6m2y CAD receivers vs 6m2y USD receivers, and selling CAD 10s versus Treasuries.”
“The front-end of the curve is incorporating two hikes, albeit at a slower pace than our base case. Nonetheless, with markets still set up for tightening next year, a longer than expected BoC pause would cause the front-end to rally further whereas modest tightening will not trigger an excessive sell-off.”
“Following the strong relative performance in Canadian fixed income over the last month, we are back at historically rich levels for Canada-US spreads. Insofar as we look for the Bank of Canada and Fed to lift rates in lock-step, there is a compelling case to own US 10s versus Canada.”
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