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Can-US 2Y Yield Differential Tightest Since Late October

  • GoCs trade ~1.5bp richer on the day to underperform Treasuries (2.5-3.5bp richer) ahead of CAD GDP/US PCE & durable goods at the bottom of the hour.
  • The Can-US 2Y yield differential of -38.5bps has narrowed further after yesterday’s larger adjustment and is at its highest since late October before signs of softer growth and faster labour market moderation.
  • Excerpts from the BoC’s market consultation released late yesterday: "A universal response from participants was the current mismatch between very strong demand for 30Y bonds and limited supply [ …] Many respondents noted that even small trades in 30Y bonds can move markets somewhat and trying to trade larger positions can be challenging. Market participants therefore requested Canada to consider increasing the amount of 30Y bond issuance."
  • “Several market participants raised the topic of RRBs. Beyond comments around the lack of advance warning ahead of last year’s cancellation of the program, participants noted that there is strong demand for RRBs given it is the key asset available for hedging Canada-specific inflation risk and serves as an important curve to value Canadian pension liabilities. Many investors, including pension plans, have had to turn to imperfect inflation hedging assets such as US TIPS and are therefore becoming more exposed to a change in correlation between US and Canadian CPI. While acknowledging that a resuscitated RRB program is very unlikely, many participants expressed that it would be welcome.”

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