CIBC: The Duration Rally: Too Fast? Too Furious?

CIBC note that “financial markets usually overreact to economic data and over-hyped themes, and the recent rally in the bond market is a reminder of this truth.”

• “While the level of yields is now very consistent with the path of expected BoC policy adjustments, our subjective view of the Bank means duration is still at risk.”
• “A redistribution of the timing of cuts, even a marginal one, will have very dramatic implications for the front-end that would promulgate further out the curve. We continue to look for GoC 10yrs to reach 3.30% in Q124.”
• “A sensitivity analysis of what a redistribution of easing does to 2yrs, and thus 10yrs, allows us to calibrate the curve.”
• “We find that 2s5s is slightly too steep while 10s30s is quite close to fair value. The most vulnerable curve segment is 5s10s, and therefore 2s5s10s (belly cheapening) offers a tremendous opportunity at present.”