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AU-CA 10-Year Yield Differential At Fair Value At Highest Level Since December

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The BoC is widely expected to cut its policy rate by another 25bps to 4.50% at this week’s meeting, with the markets pricing over 95% chance of a cut, up from less than 50% two weeks ago.

  • From a cross-market perspective, the AU-CA 3-month swap rate 1-year forward (1Y3M) spread is currently at its highest level since December 2022. This spread sits within the upper half of the -50bps to +100bps range observed over the past two years. The 1Y3M differential serves as a proxy for the expected relative policy path over the next 12 months.
  • A simple regression of the AU-CA cash 10-year yield differential, which is currently at its highest level since last December, against the AU-CA 1Y3M spread over the past 12 months suggests that the 10-year yield differential is currently at its fair value of +94bps.


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The BoC is widely expected to cut its policy rate by another 25bps to 4.50% at this week’s meeting, with the markets pricing over 95% chance of a cut, up from less than 50% two weeks ago.

  • From a cross-market perspective, the AU-CA 3-month swap rate 1-year forward (1Y3M) spread is currently at its highest level since December 2022. This spread sits within the upper half of the -50bps to +100bps range observed over the past two years. The 1Y3M differential serves as a proxy for the expected relative policy path over the next 12 months.
  • A simple regression of the AU-CA cash 10-year yield differential, which is currently at its highest level since last December, against the AU-CA 1Y3M spread over the past 12 months suggests that the 10-year yield differential is currently at its fair value of +94bps.


Keep reading...Show less