Desjardins Sees An Opportunity Again to Hold Government of Canada Bonds Vs U.S. Treasuries

07:30 AM EDT, 07/08/2025 (MT Newswires) -- Since troughing in mid-April, Government of Canada (GoC) bond yields have risen across the curve, noted Desjardins.

In part, that reflects the view that the Bank of Canada is getting close to the nadir of its rate-cutting cycle, with market participants unwinding some of their bets on further monetary easing. However, it also reflects the rising term premium embedded in GoC bonds, said the bank.

Its estimate of term premium has increased in recent weeks, coinciding with big fiscal announcements from the federal government. Notably, over that same period, the bank's estimates of term premia have been drifting lower in other jurisdictions. That said, Desjardins expects that GoCs can outperform United States Treasuries over the next few months, with the right mix of fiscal and monetary policies.

The bank views the recent pullback in term premia in the U.S. as a short-term consolidation, rather than an end of the trend higher. In a world of changing global order, the bank sees the greater supply of bonds around the world will push investors to demand additional compensation for holding developed market sovereign debt. Given the high correlation across jurisdictions in term premia historically, Canada probably can't escape the global trend.

However, Canada's recent runup has been much more orderly compared with the spikes seen in other sovereign bond markets earlier this year.

Still, there are growing questions surrounding the ability of the federal government to fund its commitments without pushing bond yields materially higher. Such a development would effectively crowd out some private sector household and business borrowing, further tilting the Canadian economy towards government spending.

Since early April, more than half of the underperformance in Canada relative to the U.S. has come from the different trajectories of term premia in each jurisdiction. The delayed budget in Canada has left investors uncertain about the fiscal outlook, stated Desjardins.

Delivering a responsible budget in the fall could help remind investors of the very favourable starting point for Canada's public finances. The bank predicts that Canada will maintain its AAA rating. As a result, it believes that the concerns over the net supply of bonds are overblown.

The bank's view is that market participants are reassessing their U.S. exposure, leading to a gradual shift in asset allocation away from the U.S. In such an environment, Canada could be a recipient of additional capital flows, with some evidence suggesting that's already happening.

In addition, some investors have suggested that a larger, more liquid market for GoCs would create further demand from players wanting to make larger trades. As a result of this additional demand for Canadian assets, Desjardins doesn't believe that term premia will rise as much in Canada as they will in the U.S.

The recent underperformance in GoC bonds relative to USTs has also reflected differences in expectations for central bank policy rates embedded in yields.

With overdone concerns over net supply and BoC easing being underpriced, Desjardins believes a window has opened up again to own GoCs versus USTs. Responsible fiscal policy is still a key ingredient to keeping Canadian term premium contained.

However, Canadian bonds are uniquely positioned to benefit from a rotation away from the U.S., further easing from the BoC, and a superior fiscal position in a world where bond supply is set to increase markedly.

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