Daily Market Commentary
May 8, 2007
Bonds were grinding higher yesterday on little data. David Dodge's comments on the strength of the economy and currency went more or less unnoticed by the bond market, which was bid higher despite strong building permits numbers, and continues that way after the release of revised housing numbers upwards to 214,000 for March - and April 212k.
Bullish news for the Canadian economy, which is being reflected in the dollar lately, but not so much the bond market. This is the main reason we continue to expect US bonds to outperform Canada. The 10 year spread, which was at 52 bps when we started discussing this trade, is now down to 44bps. More importantly, the 2 year spread is not at 46 bps. Watch for this spread to close in on zero as our economy outperforms theirs.
The CAD$ continues to defy gravity. Even as the US$ trades higher against most currencies this morning, the CAD$ is only giving up a few pps, holding onto highs not seen since June 2006 (see chart in Daily FI snapshot)