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Investment Ideas Pimco sells Canadian government bonds, blames Poloz for confusion

Bank of Canada Governor Stephen Poloz takes part in a news conference upon the release of the Monetary Policy Report in Ottawa January 21, 2015.

© Chris Wattie / Reuters/REUTERS

Pacific Investment Management Co.'s Ed Devlin is getting out of Canadian government bonds, and Bank of Canada Governor Stephen Poloz is the reason why.

Mr. Devlin, who oversees about $17-billion (U.S.), including the Canadian portfolios for the world's biggest manager of bond funds, said higher yields are needed to compensate for the risk of buying debt whipsawed by Mr. Poloz's policy pronouncements.

"Investors should require a bigger risk premium to invest in these bonds," Mr. Devlin said by phone from Los Angeles on Friday. "If you don't know what they're going to do, you should get paid more money to invest in them than if they were fairly predictable."

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Yields on two-year Canadian bonds have swung in a 20-basis-point range since the Bank of Canada surprised investors by cutting borrowing costs Jan. 21 and Mr. Poloz said he would take out more "insurance" if needed to insulate the economy from the damage of falling oil prices. Investors anticipating another cut were caught off guard when Mr. Poloz said Feb. 24 he wanted to "see how the economy actually responds" to monetary easing, a week before the following rate-setting meeting.

Mr. Devlin, who said he's been reducing his allocation to federal government bonds in favour of provincial bonds, inflation-linked debt and bank deposit notes, isn't alone. David Rosenberg, chief economist at Gluskin Sheff & Associates, said last week Mr. Poloz has created so much confusion among investors he's risking his credibility.

Rate speculation

The Bank of Canada last week voted to maintain an overnight rate of 0.75 per cent as sufficient stimulus to help steer the economy through the oil-price slump. It was the first central bank in the Group of Seven nations to lower rates to cushion the economy against the collapse in crude in January, a move unforeseen by 22 economists in a Bloomberg News survey.

Odds of a second rate cut had climbed to as high as 80 per cent, according to trading in overnight index swaps, before Mr. Poloz abruptly changed the tone of his remarks Feb. 24, telling an audience in London, Ont. that the rate cut buys time.

The comments followed Mr. Poloz's decision in October to abandon forward policy guidance. Prior to the change, the central bank had indicated whether it had a bias toward lowering or raising rates.

"I fundamentally question someone who doesn't want to do forward guidance but speaks," Mr. Devlin said. "If he doesn't want to do forward guidance, why is he speaking?"

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More optimistic

In an e-mailed response to questions, Bank of Canada spokeswoman Louise Egan said Friday that confidence in its policy can be seen in inflation expectations, "a useful measure of the credibility of an inflation-targeting central bank," remaining anchored in the 2-per-cent range.

Mr. Rosenberg, who is credited with predicting the U.S. subprime housing crisis and a year ago forecast the Bank of Canada's easing stance, didn't want to take a guess on what Mr. Poloz will do next.

"The fact that they decided to stop offering guidance and start serving up confusion makes me gun-shy about making a call," Mr. Rosenberg said last week in an interview.

The Bank of Canada expressed optimism the economy is improving in its statement Wednesday, saying it saw fewer stresses on the economy as a result of January's monetary easing, which "mitigate the negative effects of the oil price shock, further boosting growth through stronger non-energy exports and investment."

In an interview with The Globe and Mail published Saturday, Mr. Poloz said the worst of the oil shock is yet to come. He warned of disappointing first-quarter growth at less than the 1.5-per-cent annualized rate the bank anticipated in January.

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The median forecast of 21 economists in a Bloomberg survey conducted Feb. 13 is for one more rate cut this year to 0.5 per cent.

Alternative investments

Pimco's Canadian Total Return Bond Fund had 32 per cent of its holdings in Canadian government bonds and 64 per cent in provincial debt, according to a Jan. 31 filing. The fund returned 9.7 per cent in the 12 months through Feb. 28, outperforming 91 per cent of similar funds, according to data from Morningstar Inc.

"The Bank of Canada has confused the rest of the market and it's confused me," Mr. Devlin said. "I'd rather own provincials and senior deposit notes, where I'm getting paid close to unprecedented levels of yield. There's no value in nominal government of Canada bonds."

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