There's a story out to the effect that the Federal Reserve may follow the Bank of Canada's lead and announce that it will not increase interest rates for several months or so (subject to some escape hatch if inflation starts to be a problem):
US fed may speak with Canadian accent: While policy makers have signaled they accept an increase in longer-term Treasury yields as the economy improves, some are concerned at any premature anticipation of rate rises. Fed staff have examined the Bank of Canada's public intention of foregoing an increase until 2010, according to a person familiar with the matter, without concluding the statement has proven effective.
This may be a good idea, but it would seem from the changing shape of the yield curve that those expectations are already in place:
From this graph, you'd be hard-pressed to tell which country had recently committed itself to low interest rates over the next year, and which had not.
Don't you need to know the exchange-rate futures to do this comparison?
Posted by: Jon | June 17, 2009 at 07:30 PM
I suppose - but then again, I don't think any forex model will be better than a random walk, so I'm guessing it'll be a wash.
Posted by: Stephen Gordon | June 17, 2009 at 07:35 PM
I'm not so sure that one expect any large differences between the US and Canadian yield curves, at least at longer maturities. The economies and financial markets of the two countries are very much entwined. Gov't debt in the two countries is quite similar. If there was ever a large difference in the yields at longer maturities, it would offer a very low risk arbitrage opportunity. For instance, if the 10 year yields became separated by more than 1%, then arbitrageurs would step in and buy the higher yield debt and sell the lower yielding debt at very low risk.
The main risk is the US gov't yields going up. But if that were to happen, the effects would not be confined to the US, and Canadian yields would be amongst the first to rise as well.
Posted by: Kosta | June 17, 2009 at 11:56 PM