Given the higher percentage of variable-rate mortgages in Canada, she says Canadian consumers are likely to get hit hard moving forward through 2024. The upshot, from PIMCO’s point of view, is that there’s medium- to long-term value to be had in owning Canada over the US, particularly on the front end.
How could things unfold in the US and Canada’s fixed-income head-to-head next year? PIMCO sees two potential scenarios.
“The first is you get coordinated disinflation from both the US and from Canada, which allows the Fed and the Bank of Canada to ease together. And that’s currently what’s priced into the curve,” Browne says. “In this scenario, you’ll probably see both bond markets rallying up on a relative basis, and there’s not much outperformance from Canada, but you’ll do well owning bonds.”
Under the second scenario, which Browne says is more consistent with what PIMCO is seeing, is that the US economy will slow more gradually than the Canadian economy, which allows the Fed to remain on hold for longer given still elevated inflation. Canada’s economy, meanwhile, would have to ease more quickly as it contends with a much worse economy. The upshot, she says, is that Canada would materially outperform the US overnight rates.
“The data we’re thinking about right now all suggest that growth has slowed much faster in Canada, given the combination of higher household leverage and faster mortgage resets of five years,” Browne says. “We think this is going to continue to drag on Canadian growth next year, and likely lead to Canadian bond outperformance.”