Fidelity Investments money manager David Wolf said he’d rather own U.S. government bonds even as the Bank of Canada propels a rally in Canadian government securities.
Wolf, who helped steer Bank of Canada monetary policy as an adviser to Mark Carney during the financial crisis, said he prefers U.S bonds because they pay higher yields and hold their value better in a global economic downturn. U.S. 10-year notes yield 2.35 percent, compared with 1.58 percent for similar maturity Canadian government debt, with the gap reaching the most since May 2006.
“There are risks out there that haven’t yet been fully acknowledged that make us uncomfortable,” Wolf said. “Given where Canada is right now in terms of how bonds are priced, given the effects of monetary-policy divergence on the currency, and given risks specific to Canada, we prefer to allocate in fixed-income towards unhedged U.S. duration.”
Wolf, who oversees C$50 billion ($39 billion) of assets at Fidelity Investments in Toronto, spoke in an interview after Canada’s central bank cut rates for the second time this year to shield the economy from the damage of a crash in oil prices.
Canadian bond yields have overcompensated for the risk of inflation, which has receded, but still exists, he said. Canada’s dollar fell as much as 1.8 percent after the central bank rate cut, further enhancing the value of U.S.-denominated assets.
“Growth and inflation fundamentals in Canada are weak and that has already been discounted and it’s not clear how much further it can go,” Wolf said. “It’s pretty unusual to see Canada trade this far outside the U.S.”