Bank of Canada Hawkishness Has CI Investments Favoring U.S.

(Bloomberg) -- Don't fight the central bank, the saying goes. Kamyar Hazaveh, who leads a team overseeing C$11 billion ($8.8 billion) in fixed income at CI Investments Inc., is taking it to heart.

Despite believing the Bank of Canada was wrong to raise interest rates last month, Hazaveh's team is favoring U.S. Treasuries over their northern counterparts.

“The rate hike and subsequent hawkishness of the bank risk being a policy mistake,” Hazaveh said in a phone interview from Toronto, citing low inflation and weak business sentiment. Still, he expects the bank may raise rates again in the fourth quarter this year.

Governor Stephen Poloz and his colleagues took the market by surprise by turning hawkish in June after months of emphasizing concerns over Canada's fragile economy. On July 12, the bank raised interest rates for the first time in seven years, pushing bond yields up the most in developed markets since the end of May.

“People are not going to bet against the bank, at least not initially,” Hazaveh said. “It's more of a story for the end of the year and the first quarter next year when you want to position your portfolios for a reversal of the current hawkishness of the bank. I'm afraid that in the interim we will see higher interest rates.”

Hazaveh sees the Federal Reserve nearing the end of its monetary tightening as Canada's gets underway and offsetting his Treasuries' position with Canadian curve steepeners, which favor short-term bonds over longer-term.

Higher Rates

“I don't see the bank changing the narrative until they do their analysis again and take into account the increased Canadian dollar value and the slowdown in the housing market,” he said. That may be months away, according to Hazaveh.

Home prices in Toronto posted their biggest monthly drop in at least 17 years in July and sales plunged amid government efforts to cool the market, data on Thursday showed. .With more than a 7 percent rise against the U.S. dollar in the past two months, the loonie is the best performing currency among 31 major peers tracked by Bloomberg.

The jobs market remains strong with the unemployment rate falling to 6.3 percent in July, the lowest since October 2008, as the labor market added another 10,900 jobs during the month.

There's a 75 percent chance the Bank of Canada will increase rates by another 25 basis points to 1 percent this year, according to overnight index swaps data compiled by Bloomberg. Two-year yields have soared 56 basis points since the end of May, while the rate on 10-year bonds advanced 51 basis points, breaking above 2 percent for the first time since 2014 before dipping back to trade at 1.92 percent on Friday.

To contact the reporter on this story: Maciej Onoszko in Toronto at monoszko@bloomberg.net.

To contact the editors responsible for this story: Christopher DeReza at cdereza1@bloomberg.net, Jacqueline Thorpe, David Scanlan