Premise
- early year Obama confidence equity rally, combined with bond supply concerns will cause yields to temporarily sell off (much the same way market was focused on commodity-fueled inflation last spring) from recent virtual-record lows
- economic data will continue to deteriorate, as will corporate profits
- credit crunch will not go away any time soon, nor will housing recession end in 2009
- liquidity trap will prevent traditional monetary policy from being effective, while credit crunch (and U.S. making same mistakes Japan did with respect to zombie banks) will prevent experimental Fed policy from gaining traction
- Fed can print money, but can’t force people to borrow/lend or spend; velocity will drop, as will broad money measures, as contraction in credit more than offsets expansion of monetary base
- Tightened credit conditions and spreads blowing out means Fed has been pushing on a string, which means there really has been no monetary stimulus to offset all the economy’s problems
- global growth will underperform even the recently-downgraded projections, with the fall-off in emerging markets being the most surprising, as global trade effectively shuts down
- even if we don’t get 2 consecutive quarters of negative growth in near-term, by any other measure, Canada’s economy is already in recession, joining most of the OECD
- U.S. recession will last years (if one looks through stimulus-induced bounce which will prove to lead to a double-dip) (with unemployment exceeding 10% in 2010) until the misallocations of the past 15 years are finally adjusted to (too much overcapacity in housing, in CRE, in banking, in autos; too much debt: too much personal debt at household level; too much junk debt in corporate sector; too much leverage in financial sector (way more writedowns coming)
- Fed will remain at effectively 0 into 2010; BoC will cut to 0.50 (if not lower; like BoE, may also need to resort to ZIRP and QE at some point)
Government Rates
2008 Hi Low Now
CAN 2s 3.75 1.05 1.20
CAN 10s 3.95 2.55 2.90
CAN 30s 4.30 3.35 3.65
US 2s 3.05 0.65 0.85
US 10s 4.10 2.05 2.55
US 30s 4.70 2.50 3.10
Historical Comparison
1994 Hi 1998 Low 2003 Low
Japan 2s 3.40 0.40 0.05
Japan 10s 5.00 0.80 0.50
Japan 20s 5.25 1.30 0.95
Other Considerations
- typical seasonality may play well into thematic approach above, as yields typically rise in first half of year and fall in second half; CAN10 peak yields occurred in 2001 in May, 2002 in March, 2003 in April, 2004 in June, 2005 in March, 2006 in July, 2007 in June, 2008 in Feb/June/July
2009 Forecast
H1 High H2 Low
CAN 2s 1.35 0.75
CAN 10s 3.35 2.25
CAN 30s 3.95 2.95
US 2s 1.10 0.40
US 10s 3.00 1.50
US 30s 3.50 2.00
- Spreads --- narrow in Q1 with stock market rally, re-widen to new wides in H2 as bankruptcies and defaults spike and as deflation and depression look inevitable
- 2010 risk --- disorderly resolution of global imbalances à all U.S. $ assets get killed (which should actually be good for C$ assets, including bonds, as foreigners who hold US$ diversify)
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