Trading under the North American fiscal deficit frenzy: Former PIMCO executives bet on a “steeper” yield curve between the US and Canada

The Zhitong Finance App learned that Canadian fund management company Devlin Capital is preparing for a steeper yield curve for the two major North American economies because the US and Canadian governments have both experienced huge budget deficits to pay for tax cuts, military projects, and other priorities.

The company's founder, Ed Devlin, was the Canadian portfolio manager at Pimco (Pimco). He said that even if the central banks of both countries adopt loose monetary policies, the two countries will still usher in a boom in long-term bond issuance. The Federal Reserve cut interest rates again on Wednesday, while the Bank of Canada previously kept overnight interest rates unchanged at 2.25%, which is the lower limit of what it determines to be a “neutral” monetary policy range.

The fiscal forecast announced by the Canadian government last month shows that the fiscal deficit for the next five years will increase by 167.3 billion Canadian dollars (about 121 billion US dollars) over the previous forecast. Some of the additional loans were used for defense, housing, and infrastructure construction expenses.

Devlin said, “If the government can achieve any results in implementing the investment plan, then the supply will either come from the government or the private sector, but the government will provide subsidies.” This means that long-term bond yields will rise faster than short-term interest rates, or fall slower than short-term interest rates, leading to a steeper yield curve.

The company also carried out a “strategic” transaction on Canadian 5-year treasury bonds. Previously released economic data was surprisingly strong, causing the price of Canadian 5-year treasury bonds to drop sharply. “In just the past two weeks, the price curve for Canadian 5-year treasury bonds has become unusually cheap,” Devlin said.

Devlin worked for Pacific Investment Management for almost 15 years before leaving his job and starting his own company in 2020. Last month, Devlin Capital received its first asset management client, the Canadian Imperial Bank of Commerce, commissioned it as a sub-advisor to CIBC's Canadian Fixed Income Private Equity Fund.