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BlackRock to Fidelity Divergence Wagers Pay Off: Canada Credit

Bloomberg logoBloomberg 28-03-2014 Cecile Gutscher

(For Canada Credit news alert see: SALT CACREDIT


March 28 (Bloomberg) -- Canadian yields have fallen relative to Treasuries by the most in four years as investors from Fidelity Investments to BlackRock Inc. expect the northern nation’s growth to lag an economic recovery in the U.S.

Canadian government debt yields an average 1.81 percent compared with an average U.S. yield of 1.57 percent, according to Bank of America Merrill Lynch, the closest they’ve been since August 2009. Ten-year Canadian bond yields have dropped 32 basis points this year, or 0.32 percentage point, even as the Federal Reserve scales back monthly bond purchases, setting the stage for higher borrowing costs worldwide.

Bank of Canada Governor Stephen Poloz is signaling more accommodation is possible to spur growth at a time when the U.S. is removing a key buttress to its economy. Poloz said he can’t rule out an interest-rate cut if the economy worsens. He made the comment following a March 18 speech where he said first- quarter growth may be a bit “softer” than forecast in January and the global economy may experience a “secular stagnation” that holds down Canadian output gains and interest rates.

Poloz “told us that the bank fully expects the normalization to be a slow, drawn-out process and that risks are still tilted to the downside for the Canadian economy,” Aubrey Basdeo, head of Canadian fixed-income at BlackRock, said by e- mail March 21. The speech was further evidence for the so-called Canada-U.S. divergence trade, Basdeo said.

Higher Returns

More accommodative policies by the Bank of Canada will contain Canadian yields amid a sell-off in U.S. Treasuries, Fidelity fund manager Catriona Martin predicted Dec. 20, a forecast that has paid off with returns in the Canadian bond market a third higher than those in the U.S. this year, or 2.3 percent compared with 1.7 percent, Bank of America Merrill Lynch data show.

While Canada’s debt market outperforms, traders are betting its currency will head lower to reflect anemic growth. Bets by hedge funds and other large speculators against the Canadian dollar grew by the most in three months following Poloz’s speech last week. The difference in the number of wagers by hedge funds and other large speculators on a decline in the loonie compared with those on a gain, known as net shorts, jumped to 69,805 in the period ending March 18, from 52,191 the week before, according to data from the Washington-based Commodity Futures Trading Commission.

Structural Changes

A recovery in the world’s 11th-largest economy has been hindered by structural changes such as a loss in manufacturing jobs while rising oil production in the U.S. reduces demand for Canadian exports, Basdeo said. Canada saw manufacturers’ contribution to gross domestic product shrink to 10.5 percent in October, from 16 percent in August 2000, as the currency strengthened to parity with the U.S. over the past decade, data compiled by Bloomberg show.

Inflation held below the Bank of Canada’s 2 percent target for the 22nd straight month in February, registering 1.1 percent on an annualized basis, Statistics Canada said last week. The nation’s economy is forecast to expand 2.2 percent and 2.5 percent this year and next, compared with 2.7 percent and 3 percent in the U.S., according to median forecasts in Bloomberg News surveys of economists.

“What we’ve had out of Canada hasn’t been particularly encouraging, and that’s creating this divergence,” Gennadiy Goldberg, a fixed-income strategist at TD Securities, said by phone from New York yesterday. “The U.S. is leading the growth story and Canada is following with a bit more lag than people had expected.”

--With assistance from Ari Altstedter in Toronto.

To contact the reporter on this story: Cecile Gutscher in Toronto at To contact the editors responsible for this story: Dave Liedtka at Chris Fournier, Greg Storey

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