U.S. and Canada rates update

Announcer: You’re listening to the Scotiabank Market Points podcast. Market Points is designed to provide you with timely insights from Scotiabank Global Banking and Markets leaders and experts.

Chris Kelly: Hi everyone and welcome to the Scotiabank Market Points Podcast. My name is Chris Kelly, Director, Head of U.S. Rates Sales here at Scotiabank in downtown New York City.

We are recording this episode on August 6^th, 2025, and today on the podcast we will be recapping the developments in the U.S. and Canadian rates markets so far this year and providing updated views for the rest of the year.

Which leads me to my two guests.

Joining us here in New York is Boris Sender, Director U.S. Rates Strategy here in New York, and he sits directly with our U.S. treasury traders. So, he helps our traders navigate all these challenging markets here. So, great to have you here, Boris.

Boris Sender: Great to be here.

CK: And then also from our Toronto office, we have Roger Quick, who is Director in CAD Rates strategy. So Roger, thank you also for joining today.

Roger Quick: Thanks, Chris. Nice to be here.

CK: Both Roger and Boris have been instrumental in helping our account base navigate what’s going on in the markets this year. And it certainly has been interesting and complex.

We’ll get right into it with recent developments in the U.S. So Boris, why don’t you give us a view on where you are at, in terms of what’s going on here in the U.S.?

BS: Going back the last couple of months, the two main macro themes in the marketplace has been, one, the tax bill in the U.S. and we got some clarity on that front over the course of July 4^th in the U.S. with the passing of the tax bill that gave businesses clarity on the tax structure. But also gave institutional investors, market participants such as ourselves, clarity on what deficits are going to look like, which was a focus point for treasury market participants over the better part of the last couple of years.

One thing to note is the tax bill brings about a trillion dollars of savings by way of cost reductions set against $4 trillion of tax cuts. And that’s over a 10-year horizon. So that’s about $300 billion per year in terms of its costs. And it’s supposed to have a benefit on GDP a little bit over and above its cost. So, there’s a little bit of a fiscal multiplier, and they’re supposed to create about a million jobs.

However, one thing to note is that this cost is not distributed evenly. What we find is if we look at the tax bill, the spending cuts come into effect in 2027 onwards. Whereas the tax cuts, some of which are immediately retroactive to 2025, and all the tax cuts will be live in 2026.

So, what that means is over the next 18 months or so, we’ll see the benefit of the tax cuts without seeing the downside of the spending cuts. And that means that the peak stimulus period for the tax bill will be in calendar year 2026. So, that’s, I think, a key point to emphasize.

So, this positive news overall is set against tariffs, which we know are effectively sales taxes that are assessed at the border.

Now, we did get a lot more clarity on tariffs since we last recorded our podcast episode back in April. And markets have zoomed in and kind of focused on a very narrow range of the effective tariff rate that the U.S. has effectively assessed on its trading partners. And we got certainly a lot more clarity in recent weeks with the trade accords with the European Union, with Japan, with Korea, as well as a large swath of Southeast Asian countries.

According to our calculations, starting this month in August the effective tariff rates are going to be, give or take around 15% in the U.S. and certainly we will also get more clarity on the Section 232 tariffs on pharmaceuticals and semiconductors, hopefully over the next couple of weeks. And assuming those shake out at 25%, which are similar to the auto tariffs, that’ll take the effective tariff rate up from 15% to 20%.

Now, I think most people are asking themselves, okay, so we have the positive of the tax bill, we have the negative of the tariffs. What’s the net effect of all this? And it’s really hard to tease out precisely, but it does feel like since income tax cuts have this larger fiscal multiplier than sales tax increases, that we will have, on net, a growth benefit here and probably some revenue collection.

Probably something on the order of $150 to $200 billion of net revenue collection between these two things, which I think is a positive technical for the treasury market, which has been hyper-focused and hyper-anxious around deficits.

CK: Roger, maybe some thoughts about recent developments in Canada. I know tariffs were a very big part of what’s going on in Canada as well.

RQ: Yeah, it’s been a big story. There’s been lots going on here.

I think two key things are how the tariff story has affected Canada and how it’s changed. And then also the election and the implications of that. The key thing on the tariff front is that since the April 2^nd reciprocal tariffs, Canada has largely avoided the worst of the tariffs. And also, Trump has subsequently either lowered, or backed off, or postponed tariffs globally.

In terms of Canada avoiding tariffs, the U.S. administration basically has recognized that they have to abide by the existing free trade agreement. And so most goods, it’s over 90% now, according to our Economics group, about 90% of goods are exempt under the existing free trade agreement. And so, for Canada, even though our effective tariff rate is now among the lower of the nations globally, around 5% now, we’re still in a situation where globally that level of tariffs is going to be bad for growth. It’s going to mean slower growth globally, that will in turn affect Canada even though the impact isn’t as immediate, the effect is going to happen, as in terms of slower growth over time.

And then just the uncertainty. It does make it difficult for businesses to plan. And so, I think those two things, the uncertainty and the fact that global tariffs are still quite high are going to continue to weigh on the growth outlook here in Canada.

The other key thing has been with Trump’s tariff threats and other threats to Canada. That was in many ways a big wake up call for Canada and that had a big influence on the election here. Carney kind of campaigned on the need for Canada to fix a lot of its own economic problems. And since the election, Carney has largely followed through on those kinds of nation-building type projects, infrastructure type projects, projects to reduce some regulations, trade barriers, interprovincial and things like that.

So, that’s generally a positive development going forward. But it does mean, the combination of these two things, does mean significantly more spending in Canada. Other countries are facing the same thing too, as the U.S. pulls back and becomes more isolationist, Canada and others have to become a little more self-reliant.

And so that’s going to mean both slower growth here, means bigger deficits, and then these big nation-building type spending projects are going to mean bigger deficits as well. And so, this will have implications for debt and deficits going forward and for bond issuance.

CK: Questions we always get from our customer base is what’s going on with the Fed, what’s going on with Bank of Canada?

Boris, in light of the payroll numbers, the weaker than expected payroll numbers last week, I guess the Fed outlook maybe changed for some people.

BS: One of the things we’ve seen in recent months, prior to this latest payroll, was that people kind of gave up on the idea that the labor market slowdown will mean kind of imminent Fed easing. And so, there was a little bit of fatigue in that trade, and after that very strong payroll that came out in early July, people said to themselves, okay, the labor market might be cooling, but labor supply is easing as well. And so, the net effect of it is that the unemployment rate is lower than where it was, where the Fed thinks it will be by the end of the year. And so, this will make it very difficult for the Fed to provide easing.

And now, a lot of that was reversed in this recent payroll. Not because the July was particularly weak, but it was really the downward revision to the prior two months before that. One of the larger downward revisions we’ve seen kind of since the height of the pandemic. And so that is not just one data point, that was effectively three data points that prove to be weaker than previously thought. And the unemployment rate did go back up to kind of the cycle highs here at about 4.25%, a hair away from being a rounded 4.3%. That, I think, took the Fed by surprise, I think took a lot of market participants by surprise and has led to a bit of a repricing.

Now, I would argue that this is a little bit of a deja vu from last year. We saw kind of the same dynamic and the same point of the year where the economy is holding up really, really well. And then we got a really nasty labor report in early August for the month of July. And that cascaded a massive repricing for end of 2024 rate expectations. And ultimately, the Fed delivered a hundred basis points of easing in the Fall of 2024.

Now, one of the things that also was observed last year is that, as they got going in delivering that monetary accommodation, the economy actually turned around and actually did fine. And so, we’ve seen these previous episodes of smaller soft patches that are led by some amount of mean reversion, or some amount of strength, thereafter. Which is very much in contrary to the very dynamic that the Fed is really concerned about, which is this idea of the Sahm Rule that really came to light end of last year when everyone thought that once the unemployment rate starts rising, it’s prone to having these very large, non-linear increases thereafter. And so, it seems like that same risk management approach is kicking into effect now.

Since last Friday’s payroll number, we’ve heard from a swath of FOMC participants and all of them, almost all of them, I will say on the margins, are kind of changing their tune and they’re kind of saying like, this has concerned us, and we may be able to provide more accommodation than we previously thought.

My personal opinion is that if I look at the amount of cuts that are priced for end of 2026, it’s currently a little bit above five. I think that’s a little bit too rich. I think a little too many cuts is priced into the curve, and I think part of that can be explained by what’s going on in terms of the shadow Fed chair and all the concerns around Powell being removed, and kind of the prospect of a mega dove being put into place as chairperson.

I think that media, the media sphere, the trading world kind of ran away with this narrative and kind of forgot that there’s institutional guardrails in the Fed and seven FOMC votes are required in order to pass a monetary policy decision. Now having a Fed chair, having a permanently voting member who is perhaps a little bit more dovish than the rest of the committee, certainly is worth something in terms of a couple of basis points I would say for end of 2026. But my estimate is that the end of ‘26 expectation, rate expectation, is probably around 25 basis points too rich.

So, in my opinion the latest weakness that we’ve seen in terms of the payroll report probably means that some of the accommodation that was penciled in for ‘26, once this new Fed chairperson were to take over in June of ‘26 onwards, probably should be put back into the period before then. And so, that kind of is more of a redistribution of existing easing that’s priced and more so a case for really having a lower terminal rate in the cycle.

And the reason why I also kind of say that is that the Fed already penciled in a 4.5% unemployment rate by the end of the year, we’re at 4.25%. So, it’s not like this payroll report was damaging enough that all the forecasts go out the window.

CK: Now I want to go up to Roger on the Bank of Canada. Bank of Canada can sometimes be a little more challenging to forecast than the Fed. Thoughts on the Bank of Canada going forward?

RQ: So, we do think the Bank of Canada is going to cut again.

I am a little more pessimistic on the outlook, you know, as I said, I do think the uncertainty and the elevated global tariffs are going to weigh on the growth outlook in Canada. So, I do think there’s a risk that the Bank of Canada cuts further this year. I’m a little more pessimistic on that than our Economics group. They see the Bank of Canada holding off a bit longer because of the fact that core inflation is still elevated, which is a fair point.

I mean, that’s why the Bank of Canada has paused in the last three meetings so far. But I think the risk is that the data may start turning sooner. But either way, our Economics group is forecasting the Bank of Canada cutting next year. So, it’s more a matter of ‘how long do they wait out the somewhat above target core inflation’ versus ‘how soon do they address the growth concerns’?

CK: What really helps our customer base is not only what we just spoke about, but how can you express some of these views in terms of trade ideas, should there be any kind of cross-market opportunities. We get a lot of questions about that. So, I want to give both our guests here a chance to maybe put out some trade ideas that they’ve been thinking about. So, maybe we’ll start with Boris.

BS: I would say post that repricing that we got last Friday, it does still feel like a little bit too much easing is priced into kind of the back half of 2026. And I think that more of that should come to 2025, as I mentioned, H6, H7. So, for contracts, I think is one way that steepener is one way to kind of play that theme. For clients that are used to a little bit more complexity, could look at the H6, H7, H8 fly as a way to fixate on the kind of, richness of that part of the curve and too many cuts being priced in as a result of the shadow Fed chair narrative.

I think another one could be betting on more easing in October. One of the things we’re seeing is that September is priced almost fully at 23.5 basis points, October, relatively less so. I struggle to see a world where the Fed finds a need to cut rates in ‘25, cut interest rates by 25 basis points in September, and then defer in October.

So, I do feel like as a play for further, potentially further data weakness, there’s more risk reward and potentially paying September versus receiving October. So those are the two things that I like in the very front end. But in general, I don’t think that being long outright here is the right trade in the U.S.

CK: Roger, how about your best front end customer opportunities? Where do you think customers should be thinking about on the front end?

RQ: As I said, I do think that the Bank of Canada is likely to be cutting again and I think, 2-year yields, they’re around 2.70% right now. The Bank target rate is at 2.75%. They’re pretty neutral, but I think with the likelihood that the Bank cuts further, I think that yield can eventually move lower.

Last week before the big decline in the U.S. jobs report, the 2-year yield in Canada was more like 2.83%, 2.85%. And I do think we’re going to look, we’re going to see 2-year yields move materially lower over the next six months or more. Related to that, I would, you know, I think there’s also room for the curve to steepen somewhat further.

CK: Yeah, absolutely, thanks. Now let’s move further out the curve and maybe talk about opportunities out the curve for the U.S. space. Boris, what do you think?

BS: Yeah, so this is the untalked about question right now. Everyone’s so focused on the Fed, they’re not really thinking about the issuance side as much anymore.

And one of the things that we’ve heard last week, actually last Wednesday, we heard from Treasury and they kind of keep affirming their guidance. They’re going to keep coupon auctions unchanged for the foreseeable future, for the next couple of, several quarters, I believe is the guidance.

And so, that means that any increased issuance needs is going to be met by treasury bills, and it’s certainly going to keep a lid on supply increases. And they’re also increased the size of the buybacks in the longer end of the curve, which will, on the margins at least, remove some amount of duration from the very long end targeting kind of the 10 to 20-year and the 20 to 30-year sectors.

I would say that news together, with tariff developments, even net of the cost of the tax bill, means that a lot of the deficit risks, at least in my mind, have kind of, should have receded to the background. Certainly, deficits are high, but it does seem like they’re going to be contained at these levels. And so, I think that inflection point is meaningful enough to be a little bit less concerned about longer dated yields in the U.S.

I think the other very positive technical that we’ve observed, certainly on the desk, but also kind of just episodically over the last couple of years is that whenever 30-year yields get to about 5%, there is some very meaningful debt buying that occurs.

So, it does seem like that, while there has been this deficit anxiety that has been lingering, there is a level at which the marketplace is generally comfortable owning duration risk in the U.S. I think all of those things have been a positive. Now, you know, would I venture to say that with 30-year at 4.80%, with 10-year at 4.30%, is this a place to get really bulled up on duration?

I think my views there are a little bit more neutral. I think certainly the Fed provides more accommodation of data turns over, 10-year have scoped to rally to probably the low fours, maybe even the high threes. But what I will say is that what is my framework for thinking about where 10-year belong?

10-year belong probably somewhere around where the nominal growth rate in the U.S. is, and I think we have several data points to suggest that’s probably somewhere in the 4% to 5% area. And with 10-year at 4.30%, that’s certainly somewhere in the middle of all that. And then, you know, historically when we’ve seen large deviations of 10-year from that kind of nominal anchor, it’s usually because the Fed is directing policy meaningfully away from the Taylor rule one way or the other.

Not only does the Fed need to be dovish, they need to be more dovish than what kind of inflation, and then the unemployment rate allows for them for 10-year to really go to 4%, below 4%, and really stay there. And so, I do think that their scope for 10-year to rally from here, but I do think there’s going to be a little bit of a labor soft patch that we’re currently seeing. We’ll probably see the next couple of reports, but we’re not talking about a recession, we’re not really talking about a slowdown. And that’s because there's really going to be a meaningful amount of stimulus coming from the tax bill, especially in that peak year of 2026.

And the tariffs, while they are a negative, they’re not fully offsetting the benefits of the tax bill and frankly the very large capex boom that we’re seeing in the U.S. by way of the data center build out in AI, et cetera. So, I’m not negative on the U.S. economy, and so I can’t get overly bullish on duration. I kind of would rather play the range in this environment.

CK: An interesting note, Boris, for your views here is we get a lot of questions on liquidity in the largest and most liquid government bond market in the world, in the U.S. treasuries. Are there any nuances that customers should think about in terms of liquidity in U.S. treasuries or any kind of developments over the past couple months and weeks?

BS: Yeah, that’s a good question. Certainly, what we see in the marketplace is whenever you have these very large volatility events, when you have large moves in the market, that are unanticipated, you have liquidity that reacts in concert. So, we saw that in April when there was that very difficult week on April 7^th to 11^th, when volatility was very high, we saw, or observed bid-offer spreads widen somewhat.

We saw less liquidity at the bid and offer, so we do see those dynamics. Now what we’ve seen since then is that implied volatility has declined, consistent with a lot of this macro uncertainty declining, tax bill passing, tariff clarity, kind of summer lull, et cetera. And so, I think with that liquidity has come back to some extent.

That being said, the longer-term trend is certainly of a fast-growing treasury market. The cumulative effect of all the deficits, matched against a market making capacity that’s somewhat constrained, and that’s kind of more related to bank regulatory rules. So, I think while liquidity has certainly improved from the worst levels in April, I do think that liquidity is something that I am concerned about and I think a reason to think why markets can potentially overshoot on both the upside and the downside.

CK: And then Roger, how about your views on duration in Canada space?

RQ: So, I do think we’re looking at a significant increase in supply over time and increase in deficits over time. And this is very much part of a global theme. The U.S. obviously has been leading the way on deficits lately, but Canada’s been catching up to some extent. And we’ve seen those concerns keep pressure on yields in the mid and the long part of the curve.

Some of that’s already happened. I think there’s room for more of that still to go. With the shift in the relationship with the U.S. and Canada becoming, needing to do a lot more spending on infrastructure, et cetera, et cetera. Deficits in Canada are clearly going to be going up significantly further.

So far as listeners probably know, the government hasn’t done a budget this year, the federal budget. Normally they would do that in March. They’ve postponed that till sometime in the Fall, at least that’s what they’re indicating, but there’s no date set yet.

Inevitably it’s going to, the deficit and debts and bond issuance, are going to be going higher. The question is how much this year versus how much in total, but how much this year, and then how much gets pushed into later years?

What we know so far in the election platform, the Liberal government had a deficit of 2% of GDP. So, that’s around $60-ish billion. So, a big number for the current fiscal year, it’s likely going up further than that this year. But looking further ahead, it’s probably going up further still.

In terms of what that means for the market and for interest rates this year, a fair bit of the bond issuance has already increased. We’ve, the government currently is issuing around $312 billion a year in coupon bonds at an annualized pace. That’s up about $38 billion from where they were in the first quarter of the year. So that’s a significant increase already.

We may get somewhat more of an increase this fiscal year, but I think looking forward more of the increase is probably happening later. One reason for that is, as I said at the beginning, the tariff story, having kind of moderated Canada, escaping the worst of it, Trump postponing tariffs with other countries. We’ve gone from the threat of an immediate hit to growth, to that threat being a little more spread out over time.

So that on its own probably means the deficit isn’t going up as much this year as people might have been originally fearing. And then the other thing is, partly the way they’re going to fund this, some of this spending infrastructure type spending in particular, the government’s looking at doing a combination of private sector and public sector funding, so sort of a public-private partnership.

And so even though some of these numbers are huge, like the NATO spending targets of 5% of GDP is a massive number, that’s $150 billion. Some of that’s probably going to be done, or ideally in, or at least in the government’s intention, will be done through private sector funding as well. So, even though those are huge numbers, it doesn’t necessarily mean that it’s a one-for-one increase in Government of Canada bond issuance. Now, that’s not to say, government issuance is still going up a lot, but it just may not be quite as much as some of those headlines might suggest.

And then on the other side of it is the, on the demand side, one consequence of the U.S. administration’s policies has been countries starting to look at ways to diversify somewhat away from U.S. dollar exposure. This doesn’t mean selling their existing U.S. assets necessarily, I mean, that would be the sort of nuclear route option, I suppose. But at the margin, other countries looking to, instead of buying as many U.S. treasuries, buying other types of bonds and things like that. And so, Canada’s likely to benefit from some of that marginal flow away from the U.S.

I think we’ve already seen some of this happening. We’ve seen this in, for example, the provinces issuing in other markets, corporations in Canada issuing in other markets. And so again, if we end up with a situation of, where some of these big infrastructure nation-building type projects that Canada needs to do, if some of those are going to be both a mix of public and private funding, if there’s some kind of partial federal guarantee in there, but you’re also getting a spread, that could be very attractive to some international investors and perhaps also to the Canadian pensions that are heavily diversified globally. Maybe they also look to bring back some funds to Canada if there are these potentially quite attractive infrastructure type projects.

We’ve already seen the market react to a fair bit of this as well. Canada yields used to be 150 basis points below the U.S. at the start of the year, and now they’re more like a 100 or inside 100 in some cases like in the 10-year point. And part of that is reflecting this big increase in federal bond issuance in Canada.

So, some of that’s in the market for this year, but it’s clearly going to be weighing on the market over time as well.

BS: Now Roger, it seems like you’re a fan of the steepener, you know, either the Bank of Canada will have to provide more accommodation if the economy continues to stay weak, or this issuance story really kind of cheapens the long end.

Do you see this as an all-weather trade and, what are the risks to the steepener in Canada?

RQ: Yeah, it’s a good question. I mean, we’ve liked the steepener all year for those very reasons. One, we think the central bank will cut and, and they already have cut a couple times this year. And also this supply story weighing on mid and longer term yields.

So, it’s already come a fair way. I think there is more room to go over time. And again, yeah, I think it’s from both of those factors, I do think we’ll probably get some more essential bank rate cuts that will help bring 2-year yields lower.

And I think the prospect of increasing bond issuance, especially at a time when there’s more concern about it globally. And so, globally investors are pricing in more of a term premium in markets. I think that will tend to keep pressure on mid- and longer-term yields. So, I think, yeah, there’s probably room for some further steepening still.

BS: Now, if I look at 2-year/30-year Canada, it’s breached 100 basis points in the past month. Is there an asset allocation risk where the curve gets steep enough and you have enough duration extensions in the part of liability driven investors, what have you, that kind of reflattens that curve somewhat?

RQ: Yeah, I think on the demand side, I think there will be demand for long bonds, both from in the form of Government Canada bonds, but also longer-term provincial bonds. And that’ll tend to, to some extent, keep a cap on how high those yields go.

I would also say that when talking about a steepener, I think there’s more potential in Canada for the 2-year/10-year part of the curve to steepen.

On the supply side, I don’t think the Government of Canada is going to be disproportionately issuing more long bonds. They’ll, I think issuance is going to go up across the curve, but it’s likely to be more focused in the 5-year and 10-year and 2-year, to some extent than the 30-year. So, that’s probably going to limit how much pressure goes, is placed, on longer term yields. Whereas I think more pressure will be placed on 5-year and 10-year for that reason.

And again, if back to this idea of public-private type infrastructure projects, again, if those are long-term funding, some of that funding’s going to be done via the private sector, perhaps rather than simply through the Government of Canada issuing more 30-year bonds that may also tend to limit, to some extent, upward pressure on the 30-year yield relative to say what we’ve seen in some other markets.

And for those that watch the long end of the curve, I mean, Canada is much flatter than many other markets. There’s Canada, and then the U.S. is almost twice as steep and similarly in Germany. And then, the next couple of countries, France and England, are much higher again. And then of course there’s Japan. We may not stay as flat as we are now, but I think there’s reason to think that Canada will remain flatter than, say the U.S. and Germany, over time.

BS: That kind of leads me to, what’s top of mind for me, which is kind of the cross market between the U.S. and Canada.

That has been obviously a big mover the last couple of years with 10-year U.S./Canada going from levels of about, call it, at some point it was flat as recently as 2022, kind of, you had this period of U.S. exceptionalism took that up to 150 basis points the week before, or actually the week of the Trump inauguration, that’s come off meaningfully, now it's +82 basis points. And there's some voices out there calling for a reconvergence of 10-year Canada versus the U.S. Can the supply story be meaningful enough to offset the dynamic around new players in Canada? Do you see a world where 10-year Canada/U.S. goes to zero potentially, meaningfully lower from today’s levels?

RQ: Now I’m a little skeptical that we would get that much convergence. I think the Canadian economy is still going to be weak as we adapt to this kind of new world order and tariff wars. I think tariffs, I think, are going to weaken global growth as well. And although I think there’ll be significant further issuance in Canada, partly it’s, I don’t think it’s all the story, going to be the story, this year so much now, but also, I think, the fiscal pressures are going to remain high in the U.S. as well. So, it’s hard to see the fiscal story driving complete convergence there.

And Canada also, one of the reasons yields are lower than the U.S. are, we have lower productivity. And that’s something that I think some of the projects the government’s talking about doing can probably help in the long run improve productivity in Canada, but that’s going to play out over a very long period of time.

And I think there’s scope for probably more convergence on the front end, driven by the U.S. eventually cutting rates faster than Canada. But I wouldn’t be betting or expecting that we would see that spread differential getting to zero.

CK: I want to kind of wrap it up with both Boris and Roger’s views on swap spreads. Maybe Boris we could start with you.

BS: The number one observation for me looking at swap spreads for many years now is that there are events in the markets that kind of reset the trading ranges for swap spreads.

We saw that in, for example, post the UK LDI fallout in September of 2022 when 30-year spreads reset to a lower range, that it says hasn’t recouped since. And we saw that again post April 2^nd, where 30-year spreads kind of reached new cycle lows and have once again failed to widen back to those levels.

I think that will continue to, kind of, frame my expectations for swap spreads. I don’t think that, you know, in 30-year spreads we’ll be able to go back to levels, -75 basis points or wider that we saw kind of prior to April 2^nd. A lot of that optimism was centered around the SLR reform, which is for those that are not following our rule changes in the U.S., that would exclude bank’s holdings of treasury securities, repurchase agreements, and deposits of the Fed from the calculations of capital. And so, what that means is that banks are able to invest in these low-risk endeavors without worrying about capital treatments for those banks that are kind of constrained by the balance sheet and the amount of capital that they have.

Now it seems like the initiative has sort of turned a little bit and the approach is going to be actually to just recalibrate the enhanced supplementary leverage ratio such that it doesn’t benefit treasuries repurchase agreements and, and reserves directly, but kind of will just reduce capital requirements in the largest banks.

So, in my mind, that kind of waters down the relative benefit of owning treasuries versus other securities versus making loans, et cetera. So, I don’t see the SLR story as being as unambiguously bullish for swap spreads as it was before.

We’re also in a period of time when the Treasury’s rebuilding its cash reserves. They drew that down coming into kind of the debt ceiling suspension going into the tax bill. And now that the tax bill has passed, one of the things that happened is that the debt ceiling reset to a higher level, allowing the Treasury to rebuild its cash buffer. And they’re in the process of doing that. That’ll kind of continue to be a theme until the end of September and they aim to get back to $850 billion. So that means that there’s going to be a $400 to $450 billion reduction in what people call liquidity. But that effectively is a reduction in bank reserves in the system. And so that tends to be an environment that’s not particularly favorable to swap spreads.

Now that being said, the carry dynamics are very favorable. So, I’m in the camp that on large moves, lower or tighter in swap spreads, those are probably buying opportunities, but I don’t think there is a kind of an opportunity of a century in these trades. I really don't see these spreads recouping April 1^st wides.

CK: Over to Roger, CAD swap spread view.

RQ: So, swap spreads in Canada, I mean, they’ve been driven by like the same key factor that that has been driving them in the U.S., And that is government, federal government bond supply. So that tends to push the swap spread more negative, basically as the bond cheapens versus the swap.

And we saw quite a big move in this, earlier this year. It’s come back periodically, and I think that, you know, that bond supply story, I think a fair bit of that’s now priced in. Like I said, I think there will be, you know, increases in supply going forward, but I think perhaps that’s more of the story for next year.

One dynamic that happens in Canada that’s a little bit different is related to the mortgage market here. And we’ve seen the housing market has picked up quite significantly and as borrowers originate mortgages, that sets up asset liability flows and that tends to set up flows in the swap market.

What we’re seeing, it's kind of playing out kind of how we expected, where we think borrowers, even though they might’ve got burned previously with rates going up and being in floating rate mortgages, there’s still a lot of them going into floating rate mortgages and betting that the central bank will cut rates further.

And then in the fixed rate, you know, it’s 2-year, 3-year, some 5-year, but not perhaps as much as you might think. And so, we’re seeing a significant move in 2-year and 3-year swap spreads related to this mortgage activity. We may see some more in the 5-year as well, but I think it’s going to be pretty concentrated in that 3-year point.

So, that’s one factor that will offset some of this supply driven story. But, like Boris said, it’s pretty hard to see spreads not staying near significant negative levels for quite some time given the government bond supply dynamics.

CK: With that we’re going to wrap it up here.

Thanks everyone for joining us here today. That was a fantastic conversation. Scotiabank is a very exciting place to be right now. We are growing here in New York and together with our top platform in Canada, it is just a great, dynamic place.

And I wanted to thank both of our guests here today. Boris Sender in New York, our U.S. Strategist. Thank you, Boris, for being with us today.

BS: Glad to be here and if any customers have any follow-ups, or want to talk one-on-one, happy to entertain that.

CK: And I also wanted to thank Roger Quick, up North in Toronto.

RQ: Thanks Chris, and thanks Boris. Happy to participate.

CK: I also want to take this opportunity to highlight our Economics team’s work on U.S. and Canada rates markets as well. It’s a great complement to our Strategy team. So be sure to check out what our economics group is doing.

Thanks everybody. Have a great day.

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