BMO Canadian ETF Dashboard

— as of October 31, 2019 —

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Lower for Longer

Zachary Schiller

Lower for Longer

Snapshot
The Bank of Canada (Boc) stands out as an outlier, as major central banks move back towards an accommodative policy. Markets are putting very low odds on a BoC cut through January (30% probability in December and 43% by January). A look at forecasts for 2020 real gross domestic product growth shows a median outcome of 1.7%; however, there aren’t many forecasts at 2.0% or higher. A few see a disappointing year of 1.5% or less.

With the BoC lowering its 2020 forecast to 1.7% from 1.9%, and the Q3 to 1.3% from 1.5%, it’s clear that the risks are skewed to the downside.

Details
BMO Ultra Short-Term Bond ETF (Ticker: ZST)
BMO Short Federal Bond Index ETF (Ticker: ZFS)

Benefits
We expect the BoC’s risk-reward calculation to skew in favour of an “insurance” rate cut in either December or January, a cut the bond market is not currently fully pricing in.

Trade Idea
Investors should skew their portfolios to take advantage of that tilt by trimming long duration products and moving closer to the front end of the curve. This will allow investors to benefit from front-end-led steepening of the yield curve.

Lower-for-long-Graph-848px.jpg#asset:3481

Outlook 

There’s plenty of room for downside shocks, particularly through Canada’s ties to a slowing global economy. The best place to position for these policy decisions is in the front end of the curve. The BoC has left the door ajar for a cut down the road, noting the global slowing and saying that the resilience we've seen "will be increasingly tested." This dovish tilt is consistent with our view that the BoC will cut rates once (in January). However, market pricing of a cut by January remains too low, which creates opportunities in the front end of the curve. 

Zachary Schiller

Lower for Longer

Snapshot
The Bank of Canada (Boc) stands out as an outlier, as major central banks move back towards an accommodative policy. Markets are putting very low odds on a BoC cut through January (30% probability in December and 43% by January). A look at forecasts for 2020 real gross domestic product growth shows a median outcome of 1.7%; however, there aren’t many forecasts at 2.0% or higher. A few see a disappointing year of 1.5% or less.

With the BoC lowering its 2020 forecast to 1.7% from 1.9%, and the Q3 to 1.3% from 1.5%, it’s clear that the risks are skewed to the downside.

Details
BMO Ultra Short-Term Bond ETF (Ticker: ZST)
BMO Short Federal Bond Index ETF (Ticker: ZFS)

Benefits
We expect the BoC’s risk-reward calculation to skew in favour of an “insurance” rate cut in either December or January, a cut the bond market is not currently fully pricing in.

Trade Idea
Investors should skew their portfolios to take advantage of that tilt by trimming long duration products and moving closer to the front end of the curve. This will allow investors to benefit from front-end-led steepening of the yield curve.

Lower-for-long-Graph-848px.jpg#asset:3481

Outlook 

There’s plenty of room for downside shocks, particularly through Canada’s ties to a slowing global economy. The best place to position for these policy decisions is in the front end of the curve. The BoC has left the door ajar for a cut down the road, noting the global slowing and saying that the resilience we've seen "will be increasingly tested." This dovish tilt is consistent with our view that the BoC will cut rates once (in January). However, market pricing of a cut by January remains too low, which creates opportunities in the front end of the curve.