Canadian bonds are becoming increasingly appealing to investors as economic growth slows and inflation returns to target levels, according to Ed Devlin, founder and chief executive of Devlin Capital.
“I think the Bank of Canada has done a pretty good job of cutting about 200 basis points already in this cycle,” Devlin said in a recent interview with the Financial Post. “And it looks to us like the inflation picture would give them the green light to continue to cut in the going forward. And we think they will.”
Devlin said the divergence between the Bank of Canada and the US Federal Reserve is largely due to differing inflationary pressures and fiscal strategies. “With regards to the Fed, they've got a bit more of an inflation issue around the tariffs,” he said. “Tariffs are really bad for growth in Canada. Tariffs are bad for inflation in the US.”
He added: “The Fed has taken a much more cautious stand. If you look at the Fed relative to really the other G7 countries, they're the ones lagging behind, which makes a lot of sense for like two reasons. One is that their inflation picture is a little bit more uncertain. And the other thing there is, they've been running much larger deficits as a percent of GDP in the US.”
Devlin also highlighted the potential for an economic downturn. “We think in Canada it's more likely than not in the next 12 months that we're in a recession. Hence, why we think the Bank of Canada should try to get to the policy rate down. It's at 2.75 right now. Get it down to one and a half to 2% within a year or so.”
He noted that the US may face a delayed recession, due in part to fiscal stimulus. “Again, just given their fiscal spending, they're probably a recession with a lag. Now, is that lag a year or two years? I'm not really sure.”
Regarding currency movements, Devlin said: “There's been a lot of hype about the bear market in the US dollar. And there's no way it's losing its reserve currency. There is no other currency out there that can substitute for it. But at the margin, investors, foreign investors are looking at a much more unstable environment, and they're looking to repatriate their funds.”
On oil prices, he remarked, “Oil is just a function of the global economy. You think oil is more of a proxy for global growth.”
Devlin warned that high global debt levels, combined with rising interest rates, present structural risks. “We had a debt crisis that we solved with a debt crisis, with more debt,” he said. “Now the central banks have stepped away and interest rates are going up and we've got the highest stock of debt in my lifetime, in most countries.”
He said interest rates will eventually have to come down, with high interest rates likely to “grind the economy down” through monetary policy.
“At the same time, we need interest to be lowered in order to have some kind of sustainability in our interest payments in the G7.”
CMP
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