Short-term Canadian bonds are an attractive investment as high consumer and corporate debt may force the Bank of Canada to cut interest rates, according to Capital Group.
High leverage “is part of the reason the economy has slowed down a little bit more than the central bank has expected,” said London-based Thomas H. Hogh, a fixed-income portfolio manager at Capital Group, which has about US$1.6 trillion assets under management and has bought Canadian debt.
The ratio of household debt to disposable income reached a record of 175 per cent in Canada at the end of 2018, and interest expenses for Canadian companies almost doubled to $10.8 billion from the first quarter of 2010, according to government data.
Bank of Canada Governor Stephen Poloz said earlier this month that policy makers will need to keep interest rates stimulative for now as the North American economy emerges from a soft patch.
Trading of swaps over Canadian dollar overnight rates points to a decline of less than 25 basis points in the benchmark interest rate in one year, according to market implied policy rates on Bloomberg. In comparison, futures show traders pricing in about a quarter-point cut from U.S. Federal Reserve by April 2020.
The market isn’t pricing in enough of a decline in interest rates in Canada, Hogh said in an interview in Toronto. For the longer part of the curve, the closely held firm, founded in 1931, prefers U.S. Treasuries over Canadian bonds due to higher yields, said Hogh.
“For us to start buying larger positions in Canada, we would like the Canadian dollar to be more attractive than it is today,” said Hogh.
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