Although the Canadian bond bears had some excitement a few years ago, the recent experience has been quite subdued despite a certain amount of macroeconomic fireworks (figure above).
My eyeballing of the Canadian curve suggests that it is pricing a plausible macroeconomic scenario: the economy faces weakness due to a certain someone south of the border hammering out tariff rate posts, but the weakness is somewhat manageable, and possibly only mild cuts are needed. Supply chain disruptions and tariffs might put some upward pressure on prices, but that would be offset by the prospect of weaker growth.
This puts the 10-year Government of Canada at a mediocre valuation level. It incorporates a small term premium against the prospect of mild rate cuts due to weakness, but it does not have a great cushion against a cyclical upswing. Although there is not a lot of evidence of such an upswing, it is entirely possible that a certain someone again chickens out and does not change tariff rates that matter for Canadian growth by that much. At which point, price pressures may start to matter again.
My initial scan of data pointed towards the “mediocre growth at best” story, but I hope to expand upon that impression in a follow up post. Since I have been fairly quiet recently, I wanted to just get this initial comment out first, rather than wait to see what happens with my data filtering. (Statistics Canada changed their website and I was missing Canadian data updates for some time, I finally bit the bullet and incorporated the “stat_can” module to my platform so that I can update again.) If one wanted to take macroeconomic positions, I think Canadian rates are not the best instrument — the Canadian dollar (might) be more exciting, although I am not the person to ask about currency guessing. (I got my first forex call correct, and decided to retire undefeated.)
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(c) Brian Romanchuk 2024
