Ian is joined this week by Jeremy Saunders & Brenden Donaher. The trio begins the show by talking about the elephant in the room, which is the FOMC meeting next week. Ian and Brenden discuss why a hike is likely, while Jeremy discusses the benefits of waiting until September. The discussion turns to the Bank of Canada, and why a boring BoC profile means micro trading the distribution of hikes is the only real trade. Ian outlines his view on duration, and why the structural and cyclical forces in both directions are roughly even. Brenden does a deep dive on CORRA, while Jeremy discusses his preference for owning carry on the CORRA/SOFR curve. The group finishes the episodes discussing North American swap spreads, and providing their favourite near-term trades.
Intro: Since the June meeting, break evens across the curve have gone down ten to forty basis points, and real yields across the US curve have gone up ten to forty basis points. So this debate I don't really think is about the next one to two years. It is about what they should do in July. And I don't think that anyone's going to sit around the table in July and say we have a credibility problem. Mic drop. Yeah.
Ian Pollick: Good morning, everyone, and happy Friday. Welcome to another episode of Curve Your Enthusiasm. We have a lot to talk about today. I'm joined by two guests today. So there's three of us. I'm joined by Jeremy Saunders, Managing Director of our XVA Trading Desk and Accrual Trading. I'm also joined by Brendan Donaher, Executive Director and Global Head of STIR Trading. Boys, welcome. Thank you for being here. I think going into the weekend, going into what is a very important Fed decision next week, this is where the episode should start. In my opinion, I think the Fed is in a very bad feedback loop. And I keep asking myself, what is the definition of credibility? And I ask myself that within the context of a communication strategy that has put the Fed into a corner, but also with the macro, that looks exceptionally strong. Energy prices are rising. And so maybe we'll start this episode by having a family fight. An obvious question is there's dislocations everywhere. Okay. These dislocations have to be remediated, and the Fed's the only one that's going to do it. What I'm talking about is if I look at gold prices and front-end inflation, if I look at financial conditions versus Fed pricing, if I look at front-end inflation and Fed pricing, things are just not lined up. Growth is the only way you get out of it. Growth looks very strong. And so the real question is: Is the Fed hiking next week? And Jer, I'm going to turn it to you. I'm going to start over with you. Like, do you think the Fed is hiking? Yes or no? And why?
Jeremy Saunders: Well, I didn't think this would be a contrarian view a week ago. But I am going to offer a contrarian view now, I think, compared to where many of my colleagues in the market are and say, I think the Fed will hold. Looking down, I think you know, it's interesting the way that Warsh has framed this, which is he wants to go back to first principles, and look at a mosaic of the macro and decide what to do. The macro picture I think is quite nuanced. There's a series of shocks hitting. Most of them are supply shocks. There's been tariffs and then oil. There is excess demand visible, but it's mostly in one sector, and that sector isn't particularly rate sensitive. A little bit complicating the picture is that that is driving a wealth effect in the equity market, although most recently that seems to have come off the boil, a little bit. If you wanted to look at the at the hawkish things, I think, you know, it's hard to ignore that things like retail sales seem quite strong, even though you know, what we would expect from looking at the housing market is isn't that. If you wanted to take a more dovish take, I think you would say that some of this retail sales strength is probably one off factors from tax refunds and maybe things like World Cup and that aren't expected to repeat in the second half. The labor market seems to not be an imminent concern to the downside, but certainly doesn't seem like it's adding an inflationary impulse given what wages are doing. And I think the other thing to point out is like any measure of expectations you look at seem quite well anchored. Now, if I was thinking about this from first principles as a macroeconomic monetary policy setter, what I would say is I can't do much about the supply shocks. I really want to make sure expectations don't get out of hand. And so if I think that expectations are rising, I may be forced to act. But in the interim, what I should do is talk hawkishly and try to avoid acting.
Ian Pollick: But here's the here's the question. You know, what is the definition of credibility? I keep coming back to this point because there's only so long you can say nothing. Say you want to maintain price stability, keep a very steep money market curve, keep the back end a bit flatter. And that's fine until you're faced with a real decision. And so I think Hammock said it best. She said there is no conflict in the mandate. Labor market is fine. Inflation is not fine. And so like I hear what you're saying, but there is a view out there that the longer you wait, you allow these committees to come into effect. You know, you have another, you did have another negative print in store, but now you don't. And so this reacceleration is like if you're going to hike in September, why are you waiting six weeks? That's the fundamental question.
Jeremy Saunders: It's a fair question and I don't think it's an obvious decision for them either way. I think ultimately a lot of this comes down to interpreting the personal motivations of one man who you-
Ian Pollick: don't know.
Jeremy Saunders: You don't know. And I do think that there's been a bit of a feedback loop in markets here where the market looked at, you know, in the in the old regime, you'd go into these meetings with one or two basis points priced and it was basically free money and people would be happy to take it. And we got to the end of this CPI print and there was three or four or five basis points priced. And I'm sure a bunch of market participants looked at that and said, they're not going. Waller said if it's point two, they're not going. Let's take the three or four or five. And as you sat there in that risk and thought about it, you may have thought to yourself, two certain basis points seems like a much better trade than four or five basis points, where I'm really not actually that certain. And I do think the act of those people getting out and moving price has caused a bit of a circular feedback loop in markets, whereas the price moved, other participants.
Ian Pollick: Well, it's reflective, right?
Jeremy Saunders: Yeah. It's fully reflective.
Ian Pollick: And so I want to turn over to Brendan for a second, because Jeremy's wrong. And I want to understand what you think of pricing right now.
Brenden Donaher: So first off, I side with Jeremy's wrong. I came out of this last week, same way as Jeremy, thinking you've had your data prints, they weren't quite strong enough to support the hike. We don't need it. There's five basis points left. It's probably free money. The more I've talked myself into it this week, the more I'm on the mind of, hey, why wait? You have a credibility issue at stake and I don't know how you come out of that meeting sounding hawkishly, but not delivering the hike, especially given the direction of travel. We know inflation's high, you've had a couple prints, maybe not as strong, but the direction of travel's still there. you're also at a point where oil's fifteen dollars higher than it was in the last Fed meeting. It's a material difference in the energy regime. and it to me it doesn't seem like this conflict has as easy of an off-ramp if one, you know, similarly, we did a few months ago. So I think you're in an overall different regime and you know the direction of travel. So to Ian's point, why wait? Right. so in terms of pricing, I think when you go back when we first got Warsh in, I kind of said to myself, every meeting should have 20% of a hike in it. So five basis points was kind of-
Ian Pollick: Is that kind of your no forward guidance premium?
Brenden Donaher: Yeah, it's the no forward guidance premium. It's you know, going back to it, we have the direction of travel, we know we're in a tightening cycle, we know we should be in the tightening cycle. So you're at this point that okay, five basis points seems kind of fair. and then you think about it and it's like, well, why would we wait? What do we have? And it's like you can flip two or three of the dubs fairly easily, I would think. I think the neutral bias in the Fed is fairly easy to move to the hawkish side, but the hawkish regime, you're not going to get to hold if you want to hold. So I think it's a much easier selling point to get the Fed to actually go. Now, with that being said, what their pricing is, you're sitting at eight basis points now, eight, nine beeps. It's really bad risk-reward. And I think what's happened is to Jeremy's point, you've just seen this cleansing of long positions that now given the backdrop with oil and the broader duration shift. I mean there's obviously a lot of pass through there, but I do think there is this reflexivity to it where yeah it was five beeps, it's free money, it's no longer free money maybe now he's probably going to go and I would say the interesting part to me is especially this week Jeremy probably is the outlier in commentary. I think most people I've talked to have been, they should go. They're going to go. But pricing actually to me still seems kind of low relative to that rhetoric. So I think there's still-
Ian Pollick: And it's flipped very quickly. Like a week ago, I think I was in the like by myself. Yeah, and now it's getting traction. But let me ask you this: like, are you still seeing SCP premiums? Are you still seeing like an October discount? What's the allocation look like?
Brenden Donaher: The part that's hard to dissipate for that is that it's not just the SCP premium, it's also the midterms, right? So going back to the timing question, it's October's likely dead, which originally I wasn't really a believer of, now I kind of am. I just think in general the midterm argument makes a lot more sense, especially given how much we've pulled forward and that you do have the capacity to act now. If you had to wait, it was a little more live to me. But now that you probably don't have to wait, I think that takes some of that that air out of October. So October D's somewhat interesting meetings on the curve, but outside of that, September's in this point where you know at15 beeps, it's fair and it's kind of like, okay, well now we're at you eighteen or whatever, fine. That was always going to live at twelve to fifteen beeps. That was always your floor. So just as you've added more to July, pulling stuff forward to me does make sense from a pricing standpoint. So I don't think these SCP kinks are going to be faded anytime soon like they were in the Powell regime, given the midterm equation this time. So it's not just the SCP.
Ian Pollick: Okay. Well let's switch over something a little bit more domestic. Let's talk about the bank. You know, it's Canada is so Canada. Like you are seeing green shoots at a time where the tariff noise is getting worse. You know, this tariff noise, I don't know, it it's worth something, a couple percentage points in the effective tariff rate. Greer said two days ago that there should be some type of interim deal before the end of the year. The business outlook survey is looking better, the data is looking better, and that's a key thing we've been talking about over the past couple of months. And so, you know, if Greer is saying that you're probably getting a deal before the end of the year then your small, medium-sized enterprises, which have just not done anything in a year and a half, they're not going to be overall restricted from some of this new news. And what the bank said is that there's evidence that growth is broadening, investment is improving, there's trade fatigue. Fine. I fundamentally have a starting point where Canada's starting from a relatively low base rate of two and a quarter, but they don't need to go restrictive because there's no evidence our star has gone up in Canada. Rate sensitive sectors are not doing well. And so you have what, three priced over the next year, almost four. So the question is like, what do we think is wrong in bank pricing? And Jer, maybe let me start with you.
Jeremy Saunders: Well, I don't have that much interesting to say about the Bank of Canada. So let me offer you one gentle pushback to your point about Fed credibility, which is that since the June meeting, break evens across the curve have gone down ten to forty basis points, and real yields across the US curve have gone up ten to forty basis points. So, this debate I don't really think is about the next one to two years. It is about what they should do in July. And I don't think that anyone's going to sit around the table in July and say we have a credibility problem. Now, on to Canada. My fundamental view-
Ian Pollick: Mic drop.
Jeremy Saunders: Yeah. My closing that argument. My fundamental view in Canada it's just going to be so hard to get true, sustained demand-led inflationary pressures. Housing is such a larger part of our wealth stack for people. So you're going to have a much harder time getting a wealth effect. We have seen some potential green shoots in some small parts of the market.
Ian Pollick: But coming from scorched earth.
Jeremy Saunders: Coming from scorched earth and certainly not in the like, you know, most affected parts, which is you know, one bedroom condos, investor class stuff, and I do admit this is mostly talking about Toronto and Vancouver, but that is a, you know, very substantial part of the consumer spending in Canada. And so notwithstanding all of the potential green shoots elsewhere in the economy and in manufacturing and things like that and turning the cycle, I just can't see a situation in Canada where we have genuine heat. And so I think with terminal right now priced at three and a quarter, I just think there's a lot of carry in that curve.
Ian Pollick: So that's the thing, right? Like three or two years at it's above three and a quarter. And so you're not in a world where there's enough push to excess demand that you have to go restrictive. So it's like the belly can only absorb so much of this, and from my perspective, Brenden, let me talk to you about this. Like we went through this migration where, you know, in the early part of the war you had your premium living in like Sept-Oct or like it was like what July-Sept, Sept-Oct, and then you had like a flat curve. Then we pushed that to the right where you had like Oct-Dec, Dec-Jan. Is that keep moving to the right? Like do we keep pushing this premium over? And like isn't it kind of boring?
Brenden Donaher: It well, it's boring to the extent that the curve shape is more the issue than the or the level of duration is more the issue than the curve shape. I think all you're going to live with is six months out, we'll have your premium minute, right? Six months so to nine months or so whatever your time frame is, but some point in the future, right? One thing we have seen is that as you now got to it’s called two hikes by like Q1, like it's not crazy to me in the sense that yeah, starting points matter. We're coming from a low base rate. We're sitting slightly easy policy. All these hiking cycles to me, you know, that we've priced in Canada are not a function of we need to tighten aggressively, it's a function of we can get back to a more neutral standpoint, right? So I think as you allocate two hikes across the curve, that's the trade, and that's kind of where makes sense. You do get these duration moves and you get these broader energy shocks that pass through, but you have this diminishing time value where the longer this conflict goes on, the longer we hang around you know oil between 80 and 90 bucks, it's not great for Canada, but it's also not a problematic upward growth inflation driver, right? So you have the situation where Oct-Dec straight now at you know twelve, Dec-Jan at fourteen. Like, yeah, it's probably high, it's probably aggressive, but it's just reflecting broader duration more so than the actual policy path of the DOC. So it's a carry trade to Jeremy's point. I've generally been one of the more hawkish guys for Canada and I'm kind of at a point where I just don't think they do anything anytime soon, but I could see some adjustments back to more neutral policy towards likely then or Q1 is my base case, but once you get to two hikes, you're not really going through that.
Ian Pollick: No, but that's why it's so boring.
Brenden Donaher: I think that's kind of why pricing is fine.
Ian Pollick: Like the level I have no problem with the level. the endpoint is fine. It's just the allocation is the problem and that's going to continue to be the problem and time just solves that issue. Okay, that's pretty boring. I want to just talk about-
Brenden Donaher: it is! It is boring.
Ian Pollick: It is boring. Let's just move to duration, right? Like absolute duration when I look at it, it's uncomfortable. You know, this is a very uncomfortable spot for 70 in the US ten years. You look at where CAD 2s are, 290-ish. Everything that seemed like an obvious buy six weeks ago doesn't seem all that obvious to me right now. And I'll tell you where my head's at, and then let's open this up. So like I would say in general terms, the forces that are pushing duration higher are very similar in magnitude to those pushing it lower. Maybe it's a little bit lopsided, so you get higher yields over time. You can't say there's not going to be a technical rally that could be pretty violent. But I just don't think yields, let's say by the end of this year, look terribly different than where they do today. So like what are those channels? And I think from my perspective, what's pushing rates higher is this increase in capital consumption, and that's really just the AI story. You also have this AI story that, you know, you are going to eventually replace white-collar jobs, but you're going to displace them first. And you have a high level of a debt with a lower tax base as a starting point. And that puts upper pressure on term premia. You also have inflation expectations, real term premia arising. And then you have supply. Like we put out a piece two days ago. We think that in August, the Treasury is going to drop the for the next several quarters language. If you haven't read it, check it out. But coupon supply has to come. It has to come relatively faster than people had expected. On the flip side, you have this like medium-term AI disinflationary story where, yeah, you do displace jobs, it pushes downward pressure on inflation. But then you also have the like the AI blows-up story and hurts all risk assets. And then you have this like demand for bonds because at some point they become a good hedge again. And then, you know, that's more broadly speaking, there's a very bad starting point for like risk asset valuations and credits included in that. I net those out, I see kind of higher rates. I'm a better owner of carry than I am just being outright short or long. But like maybe Jar, you know, how are you thinking about duration?
Jeremy Saunders: Yeah, unfortunately I have a quite a wishy-washy view on duration as well. I think the structural forces pushing rates higher are pretty clear. The other thing I would point to is international spillovers coming from places like Japan and places like the United Kingdom. but the problem with being I mean the location here is not amazing to be short rates. You're at the top of a range that's held for quite some time. And the problem with being short rates here is at the end of the day term yields are a policy instrument right like governments have a significant ability to change where long-term interest rates trade if they want to and they generally have an interest in them going lower and so it's always uncomfortable to bet against the direction of the target variable, particularly at these sort of extended levels. Having said that, I do agree with you. I don't like owning duration here. I just think, you know, I have a short bias, but if I had it on, which I have had on, congratulations to me. I would be pairing it here.
Ian Pollick: Yeah, like I don't know. There's some worrying trends, right? And like fiscal is a pre war theme that hasn't gone away and that's fiscal sustainability, but it's also like fiscal expansion's real. And it's going to kick off very aggressively in Canada in the second half of this year. The other thing that I'm seeing in Canada, I don't know if anyone's noticed this, but like take a look at the auction statistics. Dealers are now taking down, I don't know, 65-70% of these auctions, whereas before it was kind of 70-30 in the other direction for customers. Maybe that's a function of that these like auction strategies just aren't working. There's less demand for Canada, but like someone has to own these bonds. And so like, you know, B, let me turn over to you. I know you don't care so much about 30-year bond yields, but like talk to me about like 2s5s.
Brenden Donaher: I mean, I think it's the same story globally, right? To Jeremy's point, it is this kind of overall global fiscal spillover. And at some point in time, it's you're not quite being compensated for the overall regime we're in. And I think the stock of collateral will continue to increase, the amount of people that can own it will continue to decrease. And I think it's just a level of you have massive capex, you have massive expenditures, you have massive you know issuance globally. We're in this expansionary environment that you just don't have enough capacity to hold it right now. At least in terms of an end user. So I think you're at a point where I think-
Ian Pollick: Like you're always short. Are you short now?
Brenden Donaher: No, I'm actually well no, I've actually covered some of my shorts here. but I do structurally have a hard time. I want to be in in general flatteners on the sense that monetary policy should be pulled forward a bit and that does alleve some of your back end pressure, but it's still just a very difficult trade to stay in right now. Right?
Ian Pollick: Okay, so-
Brenden Donaher: Given that fiscal background.
Ian Pollick: Let's talk about that because I think the corollary to the duration question is curve. And I found duration easier this year than curve and typically I focus more on curve. And so I think the fundamental question is are curves too steep or too flat? I'm going to open it up to you guys. My own sense, if I'm just talking about Canada, you know, I think that this hyperscaler issuance really mucked up your normal progression in the curve. It repriced your triple B 10s30s curve, which repriced your provincial 10s30s curve, which repriced your government 10s30s curve. And that's the part of the term structure that's supposed to flatten as you kind of move through this pausing cycle. And then so what stands out to me is like the risk of more coming is not zero. It's probably closer to 75%. And so is 5s10s the kink in the curve? And I kind of think it is because like 2s5s, given where five year yields are, probably looks almost fully baked at this point, and so I have to think that like 5s10s is probably the issue. But then we talked about these global spillovers that are elevating tenure yields as well. I lean to the fact that I think 10s bonds probably can stay steeper than it should for this part of the cycle. So I would push on 5s10s a little bit. But Jared, like are curves too steep or too flat?
Jeremy Saunders: Yeah, I mean, if you look at measures of term premium on a like cross country basis, Canadian term premium still measures lower than US term premium and we're amongst the bottom of the pack. So notwithstanding the supply issues, I don't think that the steepness of our curve and particularly our 5s30s curve is a sort of supply or term premium issue. I think that relative to the relative level of two-year yields, our 10s30s curve doesn't look super crazy. People look at the box, but you've got to adjust that for the level of policy relative to something. And if you take the view that, you know, US is 75 beeps above their neutral policy and Canada is 50 beeps below their neutral policy, we should have a much steeper curve than the US. I do think that you are going to find out on Wednesday whether there is a new hawkish fed in town or whether they are just talking a big game and whatever way the curve moves in the US on Wednesday is going to be a go-with. So-
Ian Pollick: For sure, like 2s5s in Canada's going to pancake. If the Fed hikes on Wednesday, you know, you'll just see this collapse of the front end. I think.
Jeremy Saunders: Which at that point I will add, to me, that is the opportunity to steep in Canada, at least in the front end, or at least, 2s5s type things. Like we are in a very different monetary policy regime. So monetary policy-led, you know, flattening should be, I think, somewhat faded. domestically here at least. And-
Ian Pollick: I agree.
Jeremy Saunders: The other thing I'll say is just on the topic, not as much on curve but on broader duration. I'd say every increment of a 25 basis point sell off we've had, the anecdotal comment has been, well, you know, you're owning twos above X above carry or X above funding. Like you have to do it. And that's like, well, you don't have to because that policy is shifting. So that gets a-
Ian Pollick: A very smart West Coast account taught me very early on in my career, you never buy 2s at the start of a hiking cycle. And I think that's a pretty good kind of wisdom to live by. Let's switch the things a bit. Let's get more micro, okay? I want to talk about CORA. You know, we've just been through this very strange situation where we were in this kind of like plus six, plus seven, plus eight environment. You know, reserves are very stable. Injections are now 75-80% of in total reserves in the system. It's so interesting because like unlike the Fed, there is zero stigma in Canada from the banks going and asking for all the liquidity. We didn't get the deposit rate cut. So like rundown kind of moved. It didn't move to ton. But, you know, B, I'd like to understand what you're thinking about this.
Brenden Donaher: Yeah, I mean, it is by far probably one of the most, you know, discussed topics we have when you go see clients and there's a general, I say, lack of full transparency on the fixing itself and how it you know is actually being driven right now. And there's a few moving parts. On one hand, one thing that Ian alluded to earlier was the dealer takedown of options that has put upward demand on dealer funding overall, and that's just a base case. So, where we had a few months ago, the issue is the level of reserves and the distribution of reserves, now it's more a function of the velocity of things, is not allowing CORA to at least alleviate of that pressure. So you're just seeing dealers require more funding and money is moving slower from these dealers. the other thing you're also having is a function of the seasonality to it and the BOC's response rate has somewhat increased. So they're more aware of quarter ends, you know, month ends, these things, and they're a little more in front of it that way. So they'll allow these swings for a couple days and then they'll come in and inject cash or you know, potentially try to solve the issue. But, they have a general lack of incentive to overly fix the market. you know, we talked to the BOC a fair amount and they do want it to be as much of a free-float market to the extent that it can be as long as money's moving. And the reality is money is still moving.
Ian Pollick: Yeah, market discipline.
Brenden Donaher: Right. So there's that aspect of it well. you know, they are the lender of first resort, whether they like it or not. that won't shift. just given the dealer demand for funding, that won't change anytime soon. And you know, overall it's the same themes we've talked about prior. It’s just exasperating more as the stock of collateral continues to increase.
Ian Pollick: And so like let me ask you this, right? Because we've seen CORA stay somewhat elevated, GC is kind of moving in the right direction. Cross currency hasn't done anything. Do you expect it to move? Like it looks seems pretty boring.
Brenden Donaher: Generally it's kind of boring, overall I would say. The only thing I'll add is I was talking to Jeremy about this before is, as these domestic pressures increase, you're going to have continued upward pressure on cross currency in the very front end, and funding should continue to trade a bit tighter. But at the other end of it, you also have domestic call it sellers of Canadian funding who are doing a lot more in FX and not as much in repo. So they're moving Canadian dollars out of the repo market into the FX market, which is putting leftward forces on cross currency. And why they doing that? just general funding needs. It's more international investment, it's US equity ownership, it's these type of things where the flow of capital is somewhat shifted, against that you do have domestic pressures, but you're kind of in this equilibrium in cross-currency because of that.
Ian Pollick: Okay, so let's go let's go bigger. Let's go bigger. We're going to go bigger. talk to me about backhand cross-currency. We've got the provis that have obviously dominated it. The year-to-date international issuance has been enormous. We have these very important repo adjustment rules in the UK. I think that gets spread to Europe. And so you have this kind of like global demand for provincial paper, that isn't going away. so these deals stay here. What do you think about five year cross-currency, ten-year cross-currency? Any big views?
Jeremy Saunders: Yeah, I mean I think you you've got the drivers right. the circumstance in Canada is that at the very front end there's selling pressure and out in the belly there's buying pressure and who's doing what is fairly well known. I mean, you know, I don't want to spoil what my favorite trades are, but I think, you know, carry along the cross currency curve is one of the best trades I see out there. I see the reasons for the very front end being low persisting. maybe we can go up a bit, but generally speaking, I see the reasons for the back end staying supported persisting, but it's unlikely it would run away because there's a natural limiter at the ARBs. and so that curve I think is just going to stay steep and offers very good risk reward. That's these very easy to understand who's paying you and why to be short cost currency in the belly there. Okay, let's switch over to swap spreads. we haven't talked about it, I want to talk about it. You know, one of the things with CORA Rising is we haven't seen any increase in like the 25th, 75th distribution and core. And so like everyone's getting core on the other side. Two year spreads don't care. You have a May maturity, so tier spreads look relatively high. You know, Brendan, for choice, what are you doing with tier spreads? And they've been pretty dislocated versus this chip, more so than usual.
Brenden Donaher: Yeah, I mean in MMS terms, it's not that exciting. we're in a fairly narrow range on the front end. One thing I would say, and the only proxy I think is somewhat relevant in terms of why two year spreads are somewhat high is you know you're at a point where one year two year curves and where one year bills are versus two year spreads is at one of its narrowest points in the cycle. So yeah, like there's no big reason own two year spreads, but by the same token, you know, you have you still have asset swap flows, you still have an eight payers, you still have to-
Ian Pollick: We’re going to roll to the Auggies in like two weeks, that's going to put headline back to where MMS is.
Brenden Donaher: Yeah, which is fine. It's just curve shape. It doesn't it doesn't matter. At that point, it's like the MMS curve is really boring. for short answer. I mean, one thing I would say is that I was in New York a few weeks ago and talking to a few, you know, kind of players and whatnot, and the general takeaway is yeah, like they're high, but lack of a better thing to own, like I guess we'll just kind of sit on them. Like it it's not a propensity to want to add to massive asset swap through MMS positions, but you look at where probies are swapping, you look at you carry opportunities, it's like to just kind of hang out. It's one of those things where it's just not that structurally exciting.
Ian Pollick: I agree. Okay, B, thank you. Jeremy?
Jeremy Saunders: Yeah, I mean, I think Canadian spreads are very uninteresting. I think US spreads are much more interesting. US spreads have significantly outperformed Canadian spreads. Let's talk about just 10s generically over the last call it eighteen months. there's been a big rally off the sort of Liberation Day lows. reasons for why I think is a confluence of both regulatory action. So we had ESLR relief, and then also, there's been you know a bunch of paying out of like call it data center Capex type paying flows. and then there's also been as Brendan points out, a hunt for carry because there's not that much else on the-
Ian Pollick: You've also had massive funding stability in the US.
Jeremy Saunders: Yeah, so there is a second thing, which is that because the money market curve has been steep and steepening, I think that money market accounts have been keeping their duration very short, which means putting money into repo instead of buying bills, and that's east funding conditions. So all of those things, I think, are going to go away either now or in the near future. I don't see any particular regulatory actions on the horizon. There's been some discussions of FASB rule change, but I don't think it's got much juice. I don't think that the wave of data center capex is going to be as indiscriminate as it was in the past, and it also seems to be shifting more to public markets, which is in a swap spread pay. and I do also think at some point, and especially if they bring forward hiking, although that's not my base case, obviously.
Ian Pollick: Sorry, what was your base case?
Jeremy Saunders: My base case is that they skip one more meeting, but nevertheless, sometime in the next three to six months, the view of the money market curve is going to be that you want to extend, and some of that money is going to leave repo. so that's going to tighten funding conditions. and then, you know, the other the other thing to say is that risk quite high. And dollar swaps reds have traded with beta, a positive beta to risk assets. The beta has changed throughout the last 12-18 months. No, but you're short evolving in these. Yeah, you're short vol and so and then and then the other thing is as your team has been writing about is there's an expectation that at some point and maybe as early as end of July, they're going to have to signal that they're going to increase coupons. so all of this points to a need for additional risk premium.
Ian Pollick: And it's not there right now.
Jeremy Saunders: And it's not there right now and so you know I think Canadian spreads there's and then the other thing is again there is always a jump risk of yields much lower in the US and that would bring some momentum type receiving I think Canadian spreads are look like a great place to hang out. things like CMBs which are low ball, low beta to risk, still offer decent carry are a much better trade than US dollar swap spreads we're going to ask a swap yeah and then the other thing is you know the Arbs look still look good for Canadian issuers to go to the US, that'll keep it supported. Like there's not really a huge amount of push or pull on Canadians.
Ian Pollick: No, it's just stability, right? So you earn your carry.
Brenden Donaher: Yeah. The one final thing I'll add and we haven't touched on it as much, but I would say just on the US side of the equation, you go back a few months, there was this I'd say fear and concern over Warsh tightening the balance sheet and starting to open up a very quick turnaround. The reality is as Ian's team has put out, that's going to be a very slow fuse and to shrink the balance sheet mechanically will take a prolonged amount of time.
Ian Pollick: Yeah, and you're not you're not going from ample to like scarce that quickly. Okay, this is getting long in the tooth. Let's talk about favorite trades. I'll just tell you mine because I do think the Fed's going next week. you can Google my name and find a thousand contradictory remarks. So maybe I'm right, maybe I'm wrong. I like the 2s5s box. I think you're supposed to steep in Canada relative to the US, even though 2s5s in Canada should flatten on a Fed move. You know, that's a scary trade if you just look at the location because it's near the steeps that it's been, but there's no world that Canada outflattens the US next week if the Fed goes. So that would be kind of like my shoe win for the week. Jared?
Jeremy Saunders: Yeah, I'll take my nine beeps on July. and I like receiving the belly of Canadian cross currency and I like CMBs on asset swap in the belly.
Ian Pollick: Stop talking your book. Okay, B?
Brenden Donaher: I like the-
Jeremy Saunders: I thought that’s what we were suppose to be doing.
Brenden Donaher: Promotional material. I am trying to get as flat as I can July, at these levels, it's just not exciting to me. I mean it makes sense. I think it should be a little higher, but risk award's not there for me. you know, generally been running the book a bit short, what I would say now. on the US side, I'm going in with ironically to my view that they're hiking and going in with some upside calls. I think that makes sense. Is that if he is to me doesn't deliver the hike and acts somewhat dovishly or talks down his potential hiking bias, that will take lot of error to the curve, so I don't mind some upside to trade against my view. Canada I've been playing the micro curves a lot. I like receiving Dec-Jan around 13-14, against shorts down in 2028 just to protect the overall duration move with oil. So still trading with a somewhat short bias in Canada. we've outperformed fairly aggressively. Still think there's a lot to come out. I don't think the BOC will deliver on what's priced, but I think we can stretch much further first, and then that's the opportunity to own it. but it's not yet at a location to get long. So I much prefer doing micro BOC curves to express a long bias. So I've been receiving and flattening meetings and trading a bit short against that.
Ian Pollick: Okay, great. Listen, we hope everyone has a great weekend. Chops, thank you very much for joining me today. And remember, there were definitely bonds.
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