BCA Research predicts that long-term Canadian bond yields will soon fall under U.S. yields, as the interest rate policies of the countries diverge.

The Bank of Canada will likely stay on hold for at least the first half of the year, which is positive for Canadian/U.S. yield spreads, says the research firm.

It notes that the Bank’s senior deputy governor Jenkins noted in a recent speech that three factors will be critical in shaping monetary policy: domestic demand, trade, and inflation trends.

“Domestic demand is holding up well, but the strong Canadian dollar crunched exports late last year and is a significant drag on profits. Meanwhile, core inflation held below the mid-point of the Bank’s target band in December. Thus, the Bank will be reluctant to hike interest rates, even as the Fed continues on its ‘measured’ tightening path,” it predicts.

“While a diverging path for Canada/U.S. policy rates is already discounted, we expect Canadian 10-year bond yields to soon break modestly below 10-year U.S. Treasury yields,” BCA concludes.