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TD Recommend Short GoCs vs USTs

CANADA
  • “US rates are by far the most important driver for the belly and long-end of the CAD curve, so it's in some regard understandable that markets are pricing CAD and US 10s fairly closely” [with expectation that Canada will underperform on a US rally and forecasters looking for a partial correction to -45bps by end-2024].
  • “While we think markets have the direction of the move in Canada-US spreads broadly correct, they underestimate the potential magnitude”.
  • Most of this view comes from TD’s out-of-consensus view re a Treasury rally whilst “increased supply by govie-adjacent issuers in the CAD space will erode some of Canada's supply advantage in the 10-year point."
  • “We like buying US 10s vs Canada, particularly now that CA-US 10-year spreads are at the extreme lows of medium-term ranges. We avoid this trade in longs, where Canada enjoys a more favourable technical backdrop, while we expect the front-end will be more volatile and sensitive to timing.”
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