In this 2018 interview with BNN’s Andrew McCreath, Ed Devlin provided his analysis of both US and Canadian bond markets.

Ed Devlin started the segment by stating that Ray Dalio’s statement that a 1% increase in bond yields would result in the largest bear market for bonds since 1981 was a bold claim, but thought that maybe Mr. Dalio meant that the bond markets had been squeezed dry and that risk investments were looking more attractive. A factor which he believes counters Mr. Dalio’s statements is that pension funds have a very high demand for long term fixed income bonds and easily could move from riskier stock options towards the safer bond option. Ed stated that many pension funds had begun to move away from an emphasis on rate of return to “liability driven investment” to match cash flow from their portfolio with their liabilities. Regarding the effect of recent oil price increases on inflation, he thought that the main effect is in the short term, but longer term, inflation would begin to reflect more fundamental forces such as wages, as suggested by the Phillips curve. Overall, Ed thinks that we will see more inflation down the road.

In the second part of the interview, Ed moved on from discussing the US bond market and inflation towards talking about Canada. According to Ed, since Canada never saw the same drop in labour force participation that happened in the US, the relationship between labour and inflation is a bit more stable. Canadian inflation is more based off commodities, such as oil, and Ed said that he believed the Bank of Canada would continue their trend of accurate inflation rate targeting, leading to Canadian bonds outperforming. He went on to say that he is relatively neutral regarding current Canadian interest rates, but that a significant rise of 50 basis points could lead them to become overweight.

Ed also said that Canada has two big downside risks that the US does not have, keeping Canadian rates down: consumer debt is much higher; and the other is that NAFTA is more critical for the Canadian economy, which could lead to a trade shock considering the tensions surround the Trump administration and Canadian trade. He described Canada’s yield curve as the flattest among developed markets, which he believes will steepen- particularly in the belly and back end of the market- due to inflation and pressure from US rates. Ed stated that himself and other sources strongly agree that there will likely be 3 interest rate hikes by the Fed. On the subject of what the impact of foreign central banks might have on the US yield curve, such as a potential new hawkish head of the European Central Bank, Ed said that it is possible that it could cause the US yield curve to steepen- though this steepening could also be due to economic growth and not necessarily actions by central banks. He concluded by saying one trade he really likes are inflation protected securities in both Canada and the US, and that they are a bit overweight on the North American financial markets relative to Europe.