The gap between economic data in Canada and the US is creating a buying opportunity for investors in the northern country's short-term government bonds, Rosenberg Research said in a note Monday.
"While both Canada and the US are headed in the same macroeconomic direction (disinflation and soft economic growth), Canada is much further along the path," David Rosenberg said in the note. "History tells us what this means: it is a signal for a wider negative Canada-US two-year bond spread and for a rally in Canadian bonds outright."
Core consumer price inflation is running annually at 1.7% in Canada versus 2.6% in the US, while real gross domestic product trends stand at a 0.1% contraction and 2.7% growth, respectively, according to Rosenberg. Weaker Canadian growth has pushed the output gap to roughly a negative 1.3% of GDP, reinforcing a faster disinflationary path compared with the US.
Historical patterns show the Canadian two-year could push to about 2.3% over the next six months, Rosenberg reported. The note traded down about 3 basis points to 2.876% on Monday. The Canada-US two-year spread could widen from roughly -140 points to -160 points, according to Rosenberg.
New US tariffs could shave around 0.3 percentage point off Canadian growth, bringing the 2026 growth outlook down to roughly 1.1%, Rosenberg said.
Markets continue to price in Bank of Canada policy rate tightening, including a strong likelihood of an increase by the end of 2026, but that outlook appears inconsistent with the underlying economic data, according to Rosenberg.