The bull flattening trend of the past few sessions remains, Treasuries and Bunds are both rallying more than 2bps.

JULY 29,2019


The bull flattening trend of the past few sessions remains, Treasuries and Bunds are both rallying more than 2bps. Everyone is waiting on the Fed, markets are convinced that a quarter point cut is baked in and the Fed is likely to do its best to signal that this is not the beginning of a rate cutting cycle while saying that they are open to to cutting again to support inflation.

The News Canada

  • FP: “With the Bank of Canada on hold, watch our $2.19 trillion household debt load grow” (  // Shane McNeil: “Canada’s $2.19 trillion household debt load will likely start swelling again, now that the central bank appears to be on hold for at least the rest of the year with the economy going strong. Consumers hit the snooze button last year on home and vehicle purchases, but that spending is about to resume, according to Fred Demers, a director at BMO Global Asset Management in Toronto. He argues lower interest rates, an accelerating housing market, a solid labour market, record high stocks and overall decent investment returns will support consumption.”

  • RBC: “Mortgage stress tests may be in need of a 'tweak': RBC's McKay” ( // Nicole Gibillini: “The chief executive officer of Royal Bank of Canada says the contentious mortgage rules introduced in January 2018 could be tweaked now that the country’s housing market has cooled, but says the regulations are still needed overall. “When we didn’t have the monetary policy to slow [the housing market] down, we needed to look at prudent regulatory policy. And I think vetting consumers for a higher interest rate environment was prudent,” David McKay told BNN Bloomberg’s Greg Bonnell Thursday.”

The News International

  • REUT: “A Key Reason the Fed Struggles to Hit 2% Inflation: Uncooperative Prices” ( // Paul Kiernan: “A paper published last month by economists James Stock of Harvard University and Mark Watson of Princeton University found prices accounting for nearly half of the Fed’s preferred inflation gauge, the personal-consumption-expenditures price index, don’t respond to changes in economic activity. In 2017 economists at the Federal Reserve Bank of San Francisco found such “acyclical” goods and services made up a whopping 58% of that index. The Fed influences inflation by lowering rates to spur demand or raising them to curb it. The new research suggests that to lift overall inflation the Fed may have to stimulate larger price increases in sectors where the Phillips curve still exists to compensate for subdued inflation in those where it doesn’t.”

  • REUT: “Global shares ease ahead of Fed test, dollar hits two-month high” ( // Ritvik Carvalho: “Global shares eased on Monday and the dollar hit a two-month high against a basket of currencies as markets counted down to a likely cut in U.S. interest rates this week, with much riding on whether the Federal Reserve signals yet more are to come.”

  • WSJ: “Chinese High-Yield Debt Is a Rare Bright Spot for Bond Investors” ( // Frances Yoon: “U.S. dollar-denominated junk bonds from Asian companies are one of the few investment products with average yields of more than 7%, as low interest rates and Treasury yields have dragged down prospective returns on a wide range of debt. In today’s market, most of the Asian high-yield bonds are from Chinese companies, and the country’s heavily indebted property developers are collectively the biggest issuer.”

  • FT: “Former Fed Chief Yellen Endorses Quarter-Point Rate Cut This Week” ( // Nick Timiraos: “Former Federal Reserve Chairwoman Janet Yellen said she endorses a quarter-percentage-point cut in the central bank’s benchmark interest rate this week because of worries over global growth and low inflation. “I would be inclined to cut a bit,” she said Sunday at an event kicking off the Aspen Economic Strategy Group meeting in Aspen, Colo. “I wouldn’t see this as the beginning—unless things change—of a major easing cycle. But I do think it’s appropriate.”

  • FT: “Japan cuts GDP forecast as exports growth expected to slow” ( // Alice Woodhouse: “Japan has cut its growth forecast for the year on expectations for slowing export growth as the fallout of the US-China trade war takes it toll in Asia. The country’s economy is forecast to grow 0.9 per cent year-on-year in the 12 months to March 2020, according to the midyear economic projection produced by the Cabinet Office. That is down from the 1.3 per cent growth forecast in January.”


Thoughts & Trades

The graph shows the Canada 2-10-30 barbell (white line) against the Canada 2-10 curve.   Both tend to move together.  The 2-10-30 has made fresh lows, at levels that went lower only for the briefest moment in 1998.  It has also moved to its lows faster than the curve has.  This implies that 10yr bonds are expensive on the curve, and it would make sense to move out of them and into 2yr and 30yr bonds.  On top of this, since the barbell is in negative territory, the trade will carry positive.  Essentially, an investor is paid to hold the position until 10yrs start underperforming.

2019 Casgrain & Cie. All Rights Reserved

2019 Casgrain & Cie. All Rights Reserved