Slower growth has prompted Bank of Canada Governor Stephen Poloz to say in policy statements that higher rates depend on signs of sustained growth, even as he retains a policy-statement warning added a year ago by his predecessor that the bank’s next move will be to raise rates. In the U.S., accelerating growth has caused Fed Chairman Ben S. Bernanke to signal he’ll probably begin reducing monetary stimulus this year, while policy makers’ forecasts indicate the key rate won’t be raised until 2015.
“With sluggish growth in Canada, I would not expect the Bank of Canada to be hiking rates through 2014,” Brian Miron, a portfolio manager in Merrimack, New Hampshire, at the fixed-income unit of Fidelity Investments, said yesterday at an investor round-table at the Bloomberg Canadian Fixed-Income Conference in New York. Fidelity managed $1.77 trillion as of June 30. “You can make the argument that with fundamentals being softer in Canada, the Fed might be the first to hike. You can see that case being made.”
The Fed has been buying $85 billion of Treasury and mortgage bonds each month in an effort to push down borrowing rates and stimulate the economy. It will decide at its meeting Sept. 17-18 to taper the purchases to $75 billion, according to a Bloomberg survey of economists on Sept. 6.
The U.S. economy will expand 1.6 percent in 2013, while Canada will experience 1.7 percent growth, according to forecasts in Bloomberg economic surveys. Then the U.S. will pull ahead, gaining 2.7 percent in 2014 and 3 percent the following year, while Canada grows 2.3 percent and 2.7 percent, the surveys estimate.
The prospects for slower Canadian growth also have Franklin Templeton Cos.’ Bissett Investment Management saying Poloz will probably let Bernanke make the first move. Canada’s central bank is leery of allowing its dollar to appreciate versus the U.S. currency because that would hurt exporters.
“The Bank of Canada is in a corner here,” Calgary, Alberta-based Thomas O’Gorman, Bissett Investment fixed-income chief, said at the round-table. “With the impact of the dollar in getting that far out in front of the Fed, I’d say the Fed probably goes first.”
O’Gorman is co-lead manager of the C$2.5 billion ($2.4 billion) Bissett Bond Fund.
Elsewhere in credit markets, Royal Bank of Canada issued C$5 million of floating-rate notes maturing in September 2018 yielding 10 basis points, or 0.10 percentage point, more than the Canadian dealer offered rate.
The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government was unchanged yesterday from a day earlier at 125 basis points, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields fell to 3.41 percent, from 3.42 percent on Sept. 11.
Spreads on provincial bonds held steady at 73 basis points more than federal-government debt, according to Bank of America’s Canadian Provincial & Municipal Index. Yields declined one basis point to 3.22 percent.
Debt of Canadian corporations has lost 1.3 percent this year, compared with a drop of 4.6 percent for provincial bonds and a decline of 3.5 percent for federal-government securities.
The Fed has held its rate target for overnight lending between banks at a record-low zero to 0.25 percent since 2008. Fifteen of the 19 participants on the Federal Open Market Committee, in Fed economic forecasts released in June, expected the first rise in the rate to occur in 2015 or later.
The Bank of Canada, which has held its rate at 1 percent since September 2010, will probably increase it by the end of 2014, according to a Bloomberg survey with 18 responses.
Canadian 10-year bonds yield 2.77 percent, compared with 2.89 percent for benchmark 10-year U.S. Treasury notes. The mean spread is about five basis points this year.
In another sign of the two nation’s diverging fortunes, Canada’s jobless rate is now projected to be higher than the U.S. in 2014, a Bloomberg News economist survey shows. That would end a five-year advantage touted by policy makers as evidence of the country’s stronger economy.
Unemployment in Canada will average 7 percent next year according to the median estimate in a survey with 15 responses gathered from Sept. 6 to Sept. 11. A separate survey forecasts a 6.9 percent jobless rate in the U.S. next year.
Canada’s employment growth this year is on track to be the slowest since 2001, outside of the last recession, as manufacturers and governments fire workers to cut costs. The U.S. is now tapping pent-up demand after a much deeper slump, while Canadian consumers curb record debts and struggling exporters delay investments.
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