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.
Key Quotes
“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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