Budget Bingo: Winners and Losers - Views from the North

Ben Reitzes:

Welcome to Views from the North, a Canadian rates and macro podcast. This week I'm joined by Robert Kavcic, a senior economist from the BMO Economics team, Fred Nastos, head of Government spread trading, and Adam Whitlam, from our Canada Institutional Sales Desk. This week's episode is titled Budget Bingo: Winners and Losers.

I am Ben Reitzes, and you're listening to Views from the North. Each episode I'll be joined by members of BMO's FIC sales and trading team to bring you perspectives on the Canadian rates market and the macroeconomy. We strive to keep the show as interactive as possible by responding directly to questions submitted by our listeners and clients. We value your feedback, so please don't hesitate to reach out with any topics you'd like to hear about. I can be found on Bloomberg or via email at benjamin.reitze@bmo.com. That's benjamin.reitzes@bmo.com. Your input is valued and greatly appreciated.

Welcome all three of you. This is a first for me. I only have two microphones, so I've been sticking to only having one guest, but we're going to share today, because sharing is caring. So we'll see how this goes, and maybe we'll do a repeat at some point if this works. The big topics today is all, I mean, it's all about the budgets, the federal budget, the provincial budgets, and our big takeaways from that, so welcome, guys.

Robert Kavcic:

Thank you. Thank you so much for having us all on.

Ben Reitzes:

Excellent. So since it is Wednesday the 17th in the afternoon, we got the federal budget late yesterday. Rob, why don't you start us off with the big picture, the big takeaways from the federal budget. It wasn't all that impactful at the end of the day, but what were your thoughts, your takeaways? Since you were in the lockup, you're probably one of a hundred people in the world that's read that 400 page budget.

Robert Kavcic:

I did not read the whole thing. So big takeaways, no market impact. There was obviously minimal, right? Like, issuance and stuff like that. Didn't see much move in the currency, didn't see much of a market impact. Big takeaways, I would say this is just a continuation of fiscal policy that we've seen jacked up a few more notches. So tax and spend, right? We've seen this for a couple of years already, and so quick arithmetic here, Ottawa basically got an extra 4 billion in revenue from a stronger economy. They raised 7 billion in taxes, so that puts us up at 11, and they spent all of that, plus an extra billion in program spending this fiscal year. So basically, left them where they were as of the fall economic statement, so that's it.

From a tax and spend perspective, obviously a ton of different priority areas, where program spending is going the big tax change, obviously an increase in the capital gains inclusion rate, there's a big dollar amount on that. It's like $7 billion this year. They're assuming some of that revenue gets pulled forward, because they figure a few corporations and individual investors are going to front-load some of the selling, but basically $4 or $5 billion a year in tax revenue from that. So it's a pretty big item. Other than that, I mean, net stimulus when you boil it all down, maybe like $5 billion for the upcoming year, so it's not a huge deal. It's probably two-tenths of a percentage point or something like that on GDP, so it's not going to move the needle on growth. It's not going to change the bank of Canada's thinking, but it's net stimulus at the end of the day.

Ben Reitzes:

Okay, so I guess the way the global mail characterizes this is that the government's gone from borrow and spend to tax and spend. Those are their words, not mine, just so I don't get in trouble. I mean, I think that that's a pretty reasonable characteristic on the direction they're going, and there's exactly no effort to really restrain spending at all at this point still. I mean, you put it I think pretty well in a number of your pieces, that if you look at the projections for spending in each successive budget for the past number of years, the path for spending in whatever the following year, two years, three years, four years, is always way higher than what's initially projected.

We're some $50, $60 billion higher for this past year than where we were supposed to be, in budget 2019 or 2020, whatever it was, probably 2019, since there wasn't really one in 2020. I guess there's no real path to that changing at this point. In addition, there's also no path to a balanced budget. Are we getting to the point of unsustainability, I guess would be my question. Many years ago, four or five, six years ago, I mused in private about Canada eventually losing its triple-A rating if we continue down this road is that something that people should be worried about?

Robert Kavcic:

Well, so Ottawa has a set of fiscal guideposts, right? And they're carefully constructed so that they could be hit this year, right? It's basically a mirage, and if you look at what's happened below the numbers, they hit all of those guideposts to within a 10th of a percentage point as a share of GDP. So you can almost see it as though they made some of the assumptions on the tax revenue to make sure those guideposts were actually just hit right on the number so they can turn around and say, "Look, we're fiscally responsible, we're fiscally credible," but reality is, "Look, they cranked out another 11 billion of program spending that's going to be recurring going forward," and to your point on some of the stuff we've been looking at, go back to budget 2021, the level of program spending now is $60 billion higher. That's persistent perennial program spending. This is not temporary COVID support, right?

Ben Reitzes:

It's forever $60 billion a year.

Robert Kavcic:

Yeah. This is-

Ben Reitzes:

Until somebody says otherwise. S.

Robert Kavcic:

Structurally-

Fred Nastos:

It's forever paid for with taxes.

Robert Kavcic:

And it is.

Fred Nastos:

Not with debt.

Robert Kavcic:

Yeah, and it is, to some extent. So there's been some tax changes going back over the last six or seven years at the top end of the income spectrum, the AMT, the increase in the bank tax. Now it's capital gains tax. So from a fiscal perspective, we're kind of running right on the edge, and we're one shock away from having a really much tougher fiscal problem to deal with in Canada, and that's one of the problems when you use debt to GDP as a fiscal anchor. Well, the denominator is going to blow out at some point. It's just a matter of when, and then you have to kind of start all over.

Ben Reitzes:

So we're sitting on the edge here, I guess, is the end of the day. The main takeaway from the federal budget. That net-net, not much stimulus, it should not impact the Bank of Canada trajectory near term. We also got CPI yesterday. The March figure was, again, really tame on the core, so the bank remains on track for a potential June cut. We'll see what April CPI does, but that's where we are at the moment with no real net new stimulus. I mean, steady as she goes. Canadian dollar didn't seem to care. I think the rumors floating around, and I know they were floating around all my chats where that things would be on the tax front, far more punitive. To put it kindly, I was scared for what the outcome might be, but we didn't get that, so I guess could have been worse?

Robert Kavcic:

And the problem is, yeah, it could have been worse, but we said the same thing last year. "Oh. We didn't get a change in the capital gains inclusion rate. We got changes to the EMT," and then the year before that it was a tax on financial institutions, which was really basically confiscation of capital off the balance sheet, so if every year it's like, "Oh. It wasn't that bad. It wasn't that bad," add up three or four years’ worth, and if you were to cram that all in one budget, you would say-

Ben Reitzes:

This is horrendous.

Robert Kavcic:

... This is terrible, right?

Ben Reitzes:

Yeah. It's almost like we have problems. Well, I mean, at some point I guess things will change. That's not going to be this year, but perhaps there'll be a little bit more focus on the productivity front at some point.

Adam Whitlam:

Was the EMT, so last year, when they made the EMT changes to the budget, in terms of recognize revenue as a result of that change, did it come in close to their forecast? I guess my question being, it seems like the federal government has fairly lofty expectations on how much this inclusion rate on capital gains, about $250,000, is going to bring in. So I guess my question is, is that a little pie in the sky, and is that going to result in, as this program spending, like we've talked about, remains really high, are we going to get into a situation where, at the next federal budget, it's like, "Well, we did this $250,000 inclusion rate, but spending, need a little bit more. Now we're going to raise this tax as well." Are we stuck in that cycle? Do you think that this is maybe too high an estimate of revenue on-

Robert Kavcic:

It's a good question, right? And it is a little early to judge the EMT, right? It's only been a year, and they're still tweaking the program. But it's a good point, because especially at the high end of the income spectrum, you have pretty creative ways to avoid taxes or to limit taxes, right? Through tax planning and stuff like that.

Adam Whitlam:

Absolutely, yeah.

Robert Kavcic:

And in this case, you could very well just at the end of the day see a movement of capital outside of Canada or less investment, so-

Adam Whitlam:

Which speaks to productivity. And you guys, I will give yourself, Doug, and the entire economics team a lot of credit here. I feel like you guys were pounding the drum on Canada's lack of productivity well before a lot of other institutions, but it seems, from what I've seen, and who knows, maybe this is Google News search filtering, but I'm getting a lot more articles in the public discourse that are talking about poor productivity in Canada, and this just seems like another nail in the productivity coffin.

Robert Kavcic:

It certainly doesn't help. So the policy itself, it might not be all that bad if you look at equalizing the tax treatment of income, versus dividends, versus capital gains. Fine in theory, but it's just another kind of strike against psychology of Canada persistently raising taxes, and like we've always been saying in our department lately, is what's worse than actually raising taxes? It's the fear of tax increases. You don't know what's coming at you, right? So it's another strike there. But yeah, to your question, I mean, I don't know if this is empirically true, but there probably is a tendency to overestimate the kind of revenue take you can get from taxes at the very high end of the income spectrum, because people get really good at planning around that are moving capital around. When you're talking big numbers like five, 6 billion, you missed that a little bit and then it has implications on the bottom line.

Adam Whitlam:

Absolutely. Yeah.

Fred Nastos:

So to me, I guess I kind of understand the want or the need to raise that capital gains inclusion, and there's different kinds of investments though, right? A capital gain is capital gain, but there's investments where you buy a startup, or you invest in a startup and you put a lot of money at risk, and to have a larger amount of that taken away in taxes is going to make people think twice about those investments.

Adam Whitlam:

Absolutely.

Ben Reitzes:

Okay, so I think our views on the budget are pretty clear.

Fred Nastos:

Can I ask one more question about the budget?

Ben Reitzes:

Sure, you can.

Fred Nastos:

If you don't mind?

Robert Kavcic:

Yeah.

Ben Reitzes:

That's why we're all here.

Fred Nastos:

On this capital gains inclusion, right? And we talked to this a little bit earlier, Ben, about how the small businesses are going to get. They're going to experience this the most, right? There's one sector of the economy that I find interesting, that I think will have some interesting knock-on effects, which is real estate, and like the mom and pop landlords versus people who've bought rental properties and corporations, right? There's a lot of development going on, right? We're trying to build more multifamily homes. I'm sure all of us are seeing more and more ads for investments in condos and things like that. Suddenly it makes that less attractive, and if you are a small landlord who has properties in a corporation, and now you have all these gains, are you less inclined to sell it and experience those gains rather than just collecting more income or more rent? Does it possibly slowdown that activity?

Robert Kavcic:

Totally fair. Totally fair. So two sides of it. You could see, I would say, some people, families, corporations, or whatever that know they have a pending sale coming. Pull that forward, right? The flip side is, if you have a rental property, maybe you delay crystallizing the capital gain, right? Exactly to your, so maybe it actually creates less selling down the road over time, and when you look at Ottawa's forecast the revenues, it actually follows that pattern, where you get a bump today, get an offset, and then you get a lower run rate going forward.

But this brings up a good point, because this hits a lot more than what Ottawa's making it out to be, just like a sliver of really high-income people. It's, think of a baby boom family with a cottage or a second rental property that's passing that down to their kids. Well, now that's taxed at a two-thirds inclusion when you deem it a disposition and transfer it to your kids, stuff like that. So it's going to hit a little bit wider than I think, and let's be honest, there's a ton of equity built up in real estate from that past generation that's going to be passed down.

Ben Reitzes:

I'll take the other side just for half a second, that it is also going to discourage people from flipping houses, I think, meaningfully. When the housing market is really hot, there are very great many people who buy, renovate, flip, and make a good amount of capital gains, more than $250,000, and the increased tax on that will be a great disincentive for that low productivity endeavor. Promote on the margin, at least it helps drive some productivity improvement.

Adam Whitlam:

Well, less obsession on financial assets, where you don't have to sell the whole thing. You can recognize capital gains at a slower rate over a period of time, and thus be below that minimum amount.

Fred Nastos:

I was thinking about financialization of real estate, in the sense that if you have a collection of flippers and a collection of properties, maybe not flippers, but a collection of investors, collection of properties, you can then sell things at a slower pace and distribute those gains.

Adam Whitlam:

Right.

Fred Nastos:

Just have a tool to manage when you take those capital gains.

Adam Whitlam:

Yeah.

Ben Reitzes:

So you want to have a conglomerate of investors. That way, you don't have to sell everything all at once.

Adam Whitlam:

Yeah.

Ben Reitzes:

Makes some sense. Let's move along here. Issuance, no big surprises, up a little bit from last year, but down from the pace that we saw in the first quarter, which I think was, I mean, from my perspective, was unexpected. I think most everybody thought issuance would hold that pace, and we also get more T-bills, which we really have barely gotten. So the increases are in a little bit of increase in longs, but the pace of issuance, actually, again, less than in Q1. Auction sizes come down a little bit. Two-year auctions come down a ton. Issuance on that space is well down from Q1's pace, calendar, Q1, so overall, just not as many bonds as necessary. Part of that's through using $16 billion in cash. Part of that's just fewer needs on the cash front for whatever reason. They've managed things a bit better. Growth certainly helps as well. There was one small change with CNBs. Fred, maybe you want to go into that?

Fred Nastos:

Sure. So in the budget, they mentioned that there were going to propose to remove the CNBs they've purchased from the allocation of CNBs to their bar authority limit.

Ben Reitzes:

So to make clear, the government, they're authorized to borrow a certain amount. It's around 1.8 trillion at the moment, and certain debts go to there. So government of Canada's are included, CMBs are included, T-bills are included, and so there's a limit on the amount that they can borrow at any given time, total debt outstanding. So go ahead, Fred.

Fred Nastos:

Yeah, and I'll just add to, that. I still don't really understand why CMBs are there at all, but they are. And so, there's a whole bunch of other debt that Canada guarantees that isn't there either, right? So just because they guarantee the CMB, it does not make it the sole reason why it should be there. But anyway, now as Canada issues debt in order to buy the CMBs, they'll be able to net that out from their borrowing authority limit. To me, it's interesting in that it makes it a little bit easier for them to purchase more CMBs if they wanted to. Even last year, when the announcement was first made, one of our concerns from when we did the podcast last year after the budget was simply, "Is there room in the borrowing authority for this?" And there was only about, as far as I can tell, about $20 billion or so of room, which they used at the end of the year for their November purchase, so this will make it much easier for them, I think, just to incorporate these purchases.

Ben Reitzes:

All right. Adam, any client reaction on the back of the budget, and no can be an answer because honestly it wasn't that exciting of a budget.

Adam Whitlam:

To your point, I would say the reaction actually was, pretty generally, "That wasn't that bad," or "That was better than expected." It was a little bit of a muted budget. So I think even from the tax and spend perspective, I think even the additional spending measures, a lot of that stuff had been pre-announced, so there wasn't anything that was glaringly obvious, reasons to really steepen the curve, or play the potential downgrade for government of Canada bonds. So I'd say my client reaction was that was pretty benign. Definitely, the market was impressed with the debt management strategy, much less issuance, much less of a focus on longs or right or wrong.

I mean, we've mentioned this to the Bank of Canada and to the Department of Finance many times about their issuance platform, and they've expressed reluctance in the past about increasing issuance in longs, and once again, they kind of stuck to that script, I guess leaving it for the provincial market to take demand there, and we'll talk about that later with their budget situation, which was, I think, very different than what we saw from the federal government, so I think that also contributed to the upside surprise from clients, is that we just saw a budget season from the provinces, which was more borrowing, higher deficits, and so this was kind of a welcome surprise, but certainly, the issuance profile was better than expected. Less issuance, for sure.

Ben Reitzes:

All right. Thank you. Thank you for the segue. That made my life much easier. Let's talk about the provinces, because I think they're more interesting, for sure, a lot more ins and outs, ups and downs there. Rob, let's get back to you. I mean there's a lot of provinces, so we're not going to go through them all. What was the broadest theme? What were the broader themes from the provincial budgets in general? Then, if there's one, two, and if you maybe three provinces you want to focus on where some good news, let's stick with the positives here. If you don't have anything good to say, don't say it at all, so we'll stick with the today. Where would you start? What was the big picture takeaway?

Robert Kavcic:

Big picture would be bigger deficits and bigger borrowing programs for most, right? So combined deficit, now we're at like $28 billion. That's off of 10 billion last fiscal year, so pretty big deepening the air in the deficit. Change in net debts, like $65 billion year-over-year, so provinces aren't just funding deficits too. Think of a province that has had 3% population growth in the last couple of years. That's a lot of transit, hospitals, and then service infrastructure that they got to start putting up, right? So there's a lot more boring on that front too.

Ben Reitzes:

So all those investments don't actually count toward the deficit, correct?

Robert Kavcic:

Correct.

Ben Reitzes:

Okay. I just wanted to make that clear for everybody out there.

Adam Whitlam:

But the gap between the deficits and the borrowing is because there's "investment going on," and I guess that pays it for itself over time?

Robert Kavcic:

Well, you pay a nurse a salary. That's an expense for the year, right? You build a road. That's obviously something that lasts for...

Ben Reitzes:

I don't know. On my street, not that long.

Robert Kavcic:

Anyways.

Ben Reitzes:

A lot of bottles.

Robert Kavcic:

It does certainly crank borrowing, so this year we're looking at biggest borrowing program, like total since that COVID era, which the COVID era obviously blew out boring to the upside, but this is the highest total since outside of that year, call it, put it that way. So that's the big theme. As a share of GDP though, we're still kind of around 1% or so, so it's not like we're looking at fiscal stress. It's just we're starting to deteriorate, and that's a big change, because you remember what we've been seeing the last three years, where every fiscal update, we were coming out with better numbers. Revenues were running, deficits were coming down, our provinces were shifting to surplus, debt burdens were coming down.

So that trade, in a sense, is kind of over, because the economy has slowed, and now unfortunately, the provinces have to pay for a lot of what we've seen over the last couple of years. So the revenue came fast and early, but things like public sector, wage pressure, infrastructure, spending demand, all that stuff comes through slowly over time, and so the balance is kind of tipping right now. The good news, not to be a big bear, is that we're kind of starting this from a pretty good fiscal spot, so there's a lot of room to move still.

Ben Reitzes:

Who would be your top two or three provinces, best performers?

Robert Kavcic:

Well, Alberta is obvious. I mean, that's easiest answer probably anybody would pick, and even now, what's oil at today? $85 bucks?

Ben Reitzes:

$85.

Robert Kavcic:

Let's call it $85 bucks, so we're already running $10 high relative to what Alberta had priced in, and a weak Canadian dollar. That's a hell of a combination for Alberta, right? So you're probably already $5, $6, $7 billion better than budget, and what? We're two weeks into the fiscal year.

Ben Reitzes:

That's pretty good.

Robert Kavcic:

It's a good start for a province that's already pretty clearly head and shoulders above everybody else. We will say Ontario, because they're not doing a whole lot that looks really good or not doing a whole lot dramatic, but a lot of others are kind of deteriorating around them, and we don't want to be negative here, but there are some other names that are pretty clearly deteriorating. So just by standing still and holding their ground on a relative basis, Ontario seems to be getting better. New Brunswick, if you want to go to a small name too, is one province that has just consistently run surpluses and is bringing down debt.

Adam Whitlam:

Seven years in a row. Beat that.

Robert Kavcic:

Yeah. It's a total anomaly. Through the pandemic even, they didn't run deficits, and then I think the simple fact is they just held firm and didn't spend a lot.

Ben Reitzes:

What? Oh, what an idea. That's crazy. Fred, what have spreads done on the back of that? What have the movements been? Where has there been some widening? Has there been any tightening?

Fred Nastos:

Well, Alberta's tightened, relative to the other provinces. Alberta actually is a pretty tough name to find right now in the secondary markets. Spreads have come in from high single digits to low single digits now, to Ontario, and I don't see why it doesn't go through, especially out here at these plus 90-ish levels and longs, I think there's lots of room for Alberta to go through Ontario. There's always the liquidity argument, but as long as Alberta maintains a good fiscal situation, as long as there's not much headline noise around-

Adam Whitlam:

Politics.

Fred Nastos:

Politics, sure. Yeah. Then, I suspect that that just brings more and more buyers in and keeps them well bid. The problems, though, did start widening back in March when the budgets first started coming out. It became clearer and clearer as they started coming out with budgets that the numbers weren't going to be as good as the market was expecting, so we've seen provinces move out in the long end, maybe 6 or 7 basis points, a bit more I guess, from 88 to 94 today, right? So yeah, so about 6 or 7 basis points. New Brunswick's held in reasonably well. I'm surprised that's not doing better.

As you said, it's a very good fiscal story. They're spreads should probably be a little bit tighter. B.C. has weakened a little bit maybe to Ontario, about a basis point or so, but the promises, I think one thing they've done is with all this extra issuance that they've announced, a lot of it's going to be done offshore, and that's actually going to end up resulting in the domestic issuance being basically almost unchanged year over year, so I think that's very supportive of spreads. The market's going through a little bit of a risk off move right now, but I suspect when that clears, and a lot of active managers are ready to take on risk again, the provinces will do well.

Ben Reitzes:

I guess what we've seen in the past, I don't know, couple of weeks or so, and even if you want to go further back past few months, so the past few months we've seen spreads kind of globally, CDX come in pretty meaningfully. Provinces lag that move, notably. I guess budget season probably was a reason for investors to be reluctant to bring in spreads.

Fred Nastos:

That's when the breaks really started to happen around there.

Ben Reitzes:

And word is about issuance, but now that, I mean, it's pretty clear that you're going to have a fair amount of issuance offshore and dollar issuance has already come in pretty strong in your relations as well. That is going to continue, I think, and again, that should limit Canadian dollar supply, which is important. We're seeing CDX widen, and the provinces kind of move a little bit wider as well, but not quite as much, outperforming a bit there. If we get a renewed risk on move, do you think provinces come in and kind tighten up that relationship with CDX, or is that basis going to stay a little bit wider?

Fred Nastos:

Oh. I know there's actually a few people who play that spread. Almost undoubtedly, when the risk tone changes and turns more constructive, it's going to be the synthetics that just rally first, right? And there'll be the CDX rush first. Provinces will lag. There'll always be a deal coming up. There's always going to be provincial supply around the corner that investors will wait for, so you should expect them to lag on the way in, I think, nut I think they'll eventually go one for one again, as they just did almost one for one in this last five, six basis points.

Adam Whitlam:

But that's the interesting part, is that it's the asymmetric return profile. So when CDX is tightening and performing well, it outperforms provies. When it goes the other way, that data gets a lot closer, which I think is indicative, I guess, of an environment where the investor base doesn't know what to do. Carry is still a big part of it, and they're still able to pick up better carry in higher risk assets. Oh, and also, I don't think the market tone has switched from, "When is this all going to absolutely fall apart?" to "This seems like it could have legs and could continue on for a while, and therefore I'm better paid in higher risk assets."

So while I think you see a lot of this provincial spreads relative to corporate spreads, and look, provincials look cheap, especially when CDX was ramping in and wasn't really moving. Yes, I think so, but I don't think that, unless you're waiting for the shoe to drop and that spread to really blow out, because corporates and beta credit gets blasted out there, I don't think you're going to see more of what we have been seeing, which is an asymmetric return profile. When risk sells off, [inaudible 00:27:02] probably sell off along with it, and when rally's back in, they probably lack that type.

Ben Reitzes:

So if they were to rally with them, that's arguably a bad sign.

Adam Whitlam:

Yeah, exactly.

Ben Reitzes:

That's [inaudible 00:27:11] most-

Adam Whitlam:

That's when you're seeing the transition, because people are waiting for the market blow up.

Ben Reitzes:

Okay, that's not bad. Are you seeing clients, I guess the reluctance generally for clients to be active here and the uncertainty, which I've recently talked about with Darren on the podcast, that has not gone away at all, and all driven by Fed uncertainty, less extent Bank of Canada uncertainty, just general central bank uncertainty, and where the rate market is going because we've sold off a ton in the past month or so?

Adam Whitlam:

And yeah, and rate vol has just astronomically trumped any spread vol that you're going to get on anything. So depending on the type of investor, if you're a long-only investor, then it's great If you think Ontario spreads look cheap here. It's just not going to matter, because tomorrow, whether or not you think they're cheap, the 10 basis point move and underlying, it's going to change the dynamics for you, and I have been seeing that, from asset manager, real money, long-only community. I've seen asset managers stepping in to parts of the provincial curve, parts of the strip curve on rate sell-offs, but it hasn't been a story about spreads. It's been entirely a story about rates.

The comments that I get after the fact are entirely related to the underlying rate curve, so that seems to be dictating that flow. I would say it's also probably worth noting the time of year. We are approaching the end of Canadian Bank, second quarter, so there's been some good pressure in the shorter end of credit curves. I do think that there is some sales being taken from the ALM community in preparation for Q2, whether that's to meet certain Aussie regulated ratios into the reporting period, that's very possible, but there's definitely some selling going on there. So some of the weakness we've seen or some of the spread flatting you've seen, say in things like fives, tens, and provies, or fives, tens in CMBs, I think some of that pressure you might see a bait in the next two weeks. So you could be getting into a period where, toward the end of April, which is when Q2 ends, you might see some support. There could be an opportunity to buy some shorter credit spreads around there.

Fred Nastos:

I agree. We also have to watch, I guess, for the, if talking about the market here, just the end of SEDAR and the BA's sort of going away, and whether that's the front end, it'll interesting to see what clients decide to do for investment purposes there.

Adam Whitlam:

Yeah. That's why they introduced the one month, whether it's one month [inaudible 00:29:32]. I have seen there's been a lot more interest, so for those of you that haven't started these conversations, the asset managers or whatnot, there's been a lot more interest in repo. Repo markets have certainly become an alternative source with BAs going away, and there obviously being no obvious asset to replace them, that's been one area where we've seen a lot more participants starting to step in.

Ben Reitzes:

Okay.

Fred Nastos:

And on the provinces, I think if you're cautious on them, right? A great place for investors to stay to be invested right now is in the public center enterprises, right? The PSEs, they're all AAA rated. Those ratings are pretty rock solid. I think they make it probably a pretty good place to hang out if you're worried about the fiscal situation sort of deteriorating at all,

Ben Reitzes:

Even if you're worried about the federal fiscal situation.

Speaker 5:

That's true.

Ben Reitzes:

The pension plans are not backed by the government at the end of the day. They're backed by their assets, and their assets aren't going anywhere.

Adam Whitlam:

You have first claim to those assets-

Ben Reitzes:

Exactly.

Adam Whitlam:

... As a bond holder of those PSCs.

Ben Reitzes:

So they should look attractive.

Adam Whitlam:

Ahead of the pensioners.

Ben Reitzes:

Mm-hmm.

Adam Whitlam:

It seems like a pretty safe investment.

Fred Nastos:

Oh. I think they're very good. They're some of the highest quality names in Canada.

Ben Reitzes:

All right. We'll wrap things up here. Before we do, I will ask for your trade ideas in a second, but big picture, I think the biggest takeaway from budget season is, I guess it could have been worse for almost everybody, except for some of the provinces, they were not great, but at least the starting point was better. Not much stimulus overall, so it doesn't change the policy picture for the bank. Issuance, higher, but really not in any way that's going to blow spreads out, for example, and Canada's still not as bad as we thought they'd be, I guess, probably the best way to put it.

We've kind of set the bar low, but so be it for now. Any trade ideas from the gentleman in the room here? My broader bias remains steepening just generally. I think, no matter what happens going forward, the curve has to steepen, be it from term premium getting built into the long end as rates continue to go higher, or we get rate cuts and you get a bull steepening. So either way, that's the bigger trend. Whether it's not like a one month or one week trade, it's a multi-month trade, but that's the bigger trend. Almost no matter what the outcome is, I don't get away from that, unless you think the Fed is going to raise rates again. That would change things, at least temporarily.

Adam Whitlam:

Yeah, I still like that one. I think last time I was on here, we were talking about one year versus three year. One year, I still think that's a good trade. It's still flat in Canada, relative to all other G10 markets, and that's even after a 15 basis points deepening that we had in the last two days. It's still flat here, relative to Australia, Japan, the US, the UK, really anywhere you want to look, so that's still a core trade that you want to have on. I alluded to it earlier. I also still think there's an opportunity to buy, if you're talking about high quality assets, I think there's an opportunity to buy provincial spreads and CMB spreads in that.

In provincial spreads, I think it's the seven-year part of the curve, six to seven year, maybe eight year. That's where you start to get the real kick, relative to CMBs. That's where you start to get some of the best roll down. Then, PSEs, we were talking about [inaudible 00:32:39] even earlier today. You get Cora spread as a swap roll downs of 12 basis points or 13 basis points for a year, and some of that PSE paper, I think that stuff looks pretty good, especially, because you get that divergence, and I think there'll be an opportunity. Whether it's today or whether it's in two weeks or a week, I think there's an opportunity to buy that now

Fred Nastos:

Even for long-only investors, if they can extend from, say, that five-year point to, say, the six seven-year point, you're talking about the 2030s for example, and so on, that's where the provincial curve goes from being inverted to positive, right? If we do get a big steepening move in the yield curve at some point later in the summer, say, that will probably steepen less. Those are good trades to sort of be extending, right? Versus the rest of the curve, I think.

Adam Whitlam:

Yeah. Fives, I think, are expensive. Fives are expensive in Canada. They remain expensive in Canada, and I think that makes sense. You'll get less pain in a steepener by rolling further out the curve.

Fred Nastos:

One thing on CMBs that's kind of interesting is that, with the rate that's happened, there's actually been not that much hedging happening, right? So while we're seeing spreads go a little bit wider, the lenders have not really been as active hedging as they have been in other cycles. And so, I'm not sure how that sort of plays out for this deal coming up in May. We expect the last reopen of this March 34 CMB, but it may have a different dynamic this year, just because there's been such little hedging, right? So that means there'll be less buying at the deal at the deal from the lenders covering their hedges.

Ben Reitzes:

Why don't we leave it there, since this is probably the longest episode I've ever recorded? Well, that's what happens when you bring three guys on. Everyone's got to talk a little bit. Gentlemen, thank you very much for joining me, and I don't know. If I get some good feedback, maybe I'll have you on again.

Fred Nastos:

Great.

Robert Kavcic:

We'd love it.

Adam Whitlam:

You're welcome. Thank you.

Ben Reitzes:

Thanks for listening to Views from the North, a Canadian rates and Macro podcast. I hope you'll join me again for another episode.

Speaker 5:

The views expressed here are those of the participants and not those of BMO capital markets, its affiliates, or subsidiaries. For full legal disclosure, visit bmocm.com/macrohorizons/legal.