Pimco Differs With BlackRock on $64,000 Question: Canada Credit

BlackRock Inc. (BLK) and Pacific Investment Management Co. (PMMNINCA), two of the world’s biggest asset managers, are split on the outlook for Canadian debt, the best performing major bond market so far this year.

Canadian bonds returned 2.28 percent in January, trailing only the gains on the debt of Bahrain and Puerto Rico, the Bank of America Merrill Lynch Global Broad Market Index shows. The yield on Canada’s two-year government bond has fallen to 0.97 percent, below the Bank of Canada’s benchmark 1.0 percent interest rate, after Governor Stephen Poloz left open the chance of a rate cut last week by saying inflation would fall below its 1 percent to 3 percent target band this quarter.

Pimco said returns have peaked and the world’s biggest bond fund manager is moving money to other nations’ debt on the view the central bank will stay on hold as Canada benefits from faster growth in the U.S. BlackRock, the world’s largest asset manager, predicts continued demand for bonds as the export-led growth forecast by the Bank of Canada fails to materialize, prolonging speculation it will cut rates.

“Our principle leg to stand on is the hope that exports can deliver some growth,” said Aubrey Basdeo, head of Canadian fixed-income at BlackRock in Toronto. “That’s kind of the $64,000 question now at the Bank of Canada,” referring to the 1950s American quiz show where contestants won cash for answering questions.

Annual Returns

Canada’s two-year bond yield will rise to 1.20 percent in two months and reach 1.65 percent by the end of the year, according to a Bloomberg survey of 11 economists conducted between Jan. 10 and Jan. 15. Last year, Canada’s bond market lost 1.62 percent, worse than the Global Broad Market Index’s 0.31 percent decline.

Structural changes in the Canadian economy such as a loss in manufacturing jobs and a discount for Canadian oil caused by pipeline bottlenecks and increased U.S. production will damp the benefits of faster U.S. growth on Canada’s exporters and the broader economy, keeping the prospect of a rate cut in place, Basdeo said.

“This is not a one quarter story in terms of weak trade -- it’s been a trend that’s been for a while now,” Basdeo said. “Something in this recovery is not working for us.”

Ed Devlin, head of the Canadian portfolio at Newport Beach, California-based Pimco disagrees.

Export Gains

“The sky is not going to fall, and those betting on the sky falling will be disappointed,” Devlin said by phone from London. “Exports will kick in. We do see the U.S. economy picking up and highly doubt that we have de-linked from the U.S. economy. That’s got to be a positive to us.”

Canada generates about a third of its gross domestic product from exports and 75 percent of those are sold to the U.S., according to data compiled by Bloomberg. U.S. growth will pick up to 3 percent this year from 1.9 percent last year, and Canadian growth to go from 1.8 percent to 2.5 percent, according to the Bank of Canada’s January Monetary Policy Report.

Investors betting on a rate cut are underestimating the boost the nation’s economy will get from U.S. trade, which will be enough to boost inflation and keep interest rates on hold, Devlin said.

“I’m underweight Canada and actually have positions in other countries such as Australia and Mexico, which I think will perform better going forward,” Devlin said.

To contact the reporter on this story: Ari Altstedter in Toronto at aaltstedter@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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