Trading in the North American financial deficit frenzy: Former PIMCO executive bets on steepening of the US-Canada yield curve.

Canadian fund management company Devlin Capital is preparing for further steepening of the yield curve in the two largest economies in North America, as both the US and Canadian governments are facing massive budget deficits to fund tax cuts, military projects, and other priorities. The founder of the company, Ed Devlin, who previously served as the Head of Portfolio Management for Pimco in Canada, stated that even with both countries' central banks adopting loose monetary policies, both countries are expected to see a boom in long-term bond issuances. While the Federal Reserve cut rates again on Wednesday, the Bank of Canada has kept its overnight rate steady at 2.25%, which is the lower limit of its identified "neutral" monetary policy range. The Canadian government's fiscal forecast released last month shows that the fiscal deficit over the next five years will increase by 167.3 billion Canadian dollars (approximately 121 billion US dollars) compared to previous estimates. The additional borrowing will be used for defense, housing, and infrastructure construction expenditures. Devlin said, "If the government can achieve any effectiveness in implementing investment plans, then the supply will come either from the government or the private sector, but the government will provide subsidies." This means that the long-term bond yield will rise faster than short-term rates, or fall slower than short-term rates, resulting in a steepening yield curve. The company also conducted "strategic" trades on Canadian 5-year government bonds, as unexpectedly strong economic data released earlier led to a significant drop in the prices of these bonds. Devlin stated, "In the past two weeks, the price curve of Canadian 5-year government bonds has become exceptionally cheap." Devlin worked at The Pacific Investment Management Company for nearly 15 years before leaving in 2020 to establish his own company. Last month, Devlin Capital secured its first asset management client, as the Canadian Imperial Bank of Commerce appointed the company as a sub-advisor for the CIBC Canadian fixed income private equity fund.