Feb. 23 (Bloomberg) -- Pacific Investment Management Co.’s Ed Devlin said Canadian bond returns will shrink this year as a fragile recovery generates growth of 1 percent, an estimate below forecasts by the government and a survey of economists.
This year won’t be a repeat of 2011, when investors reaped gains of almost 10 percent in the Dex Universe Bond index of Canadian government and corporate bonds, Devlin wrote in a note posted on the firm’s website. While Pimco, manager of the world’s biggest bond fund, expects sluggish growth in Canada, the economy is at a tipping point and could improve, he wrote.
“The bond market will likely not return anywhere close to that for many years to come,” Devlin, Pimco’s head of Canadian portfolio management, wrote of 2011. “We estimate Canadian bond-market returns in the range of 2 percent to 4 percent, and if we tip into a virtuous cycle of economic recovery, we anticipate the possibility of negative absolute returns.”
Canada’s bond market has drawn record inflows since 2009 as the nation’s economy strengthened and the government worked to eliminate its budget deficit.
“Given the major issues the world needs to resolve in 2012, we believe it is likely that the Canadian economy will enter into either a virtuous cycle of economic recovery or a vicious cycle of economic decline,” London-based Devlin wrote. “It is rare for economies to muddle through with sub-trend economic growth.”
Devlin’s growth forecast compares with an estimated 2.4 percent expansion last year and a median forecast of 2 percent for 2012 in a Bloomberg News survey of 22 economists in which projections ranged between 1.5 percent and 2.5 percent.
Bank of Canada
The Bank of Canada will probably stay in “wait-and-see mode” until the direction of the economy becomes clear, Devlin wrote. The bank has kept its benchmark interest rate at 1 percent since September 2010 to support the economy. Odds that Governor Mark Carney will hold the rate steady through September have risen to about 80 percent, from less than 50 percent on Dec. 31, according to Bloomberg News calculations.
“We expect no change in monetary policy in 2012,” Devlin wrote. “The bank does not want to preemptively hike rates and snuff out a fragile recovery. At the same time, it does not want to preemptively lower rates and potentially cause a housing or consumer debt bubble.”
Economic growth will slow to 2 percent this year as global weakness and the strong Canadian dollar boost costs to exporters, the Bank of Canada said last month. The economy will be hobbled by a European recession and slowing growth in China and the U.S., the central bank said.
Newport Beach, California-based Pimco manages $11 billion of Canadian assets as part of the $1.35 trillion it oversees. Its Canadian Long-Term Bond Fund A posted a return of 20.2 percent in the past year, according to Morningstar Inc., compared with a return of 10.6 percent for a Merrill Lynch index of Canadian government bonds in the same period.
In January, the Pimco fund returned 0.27 percent, compared with 0.16 percent for the Merrill index.
Pimco is a unit of the Munich-based insurer Allianz SE.
--Editors: Greg Storey, Paul Cox
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