The Bank of Canada and the U.S. Federal Reserve Board policy are poised to diverge further on issues of monetary polciyin the near term says BMO Nesbitt Burns in its latest Bond Strategy report.

“While the Federal Reserve will have to be convinced to move off the sidelines and raise rates, the Bank of Canada will have to be convinced to stop tightening, following a 25 basis point increase in April,” it says.

“The initial optimism that the U.S. recovery would remain robust has waned. The Fed is concerned about the sustainability of the upturn. Over half of first quarter GDP growth was due to the slowing in the pace of the inventory rundown. With Mid-East tensions spilling into higher oil prices, mortgage rates that are off their lows, and the renewed slippage in labour markets and consumer confidence, the Fed is content to remain patient,” BMO opines.

“In Canada, the weather-enhanced recovery appears to be more sustainable. Consumer spending has remained healthy, job growth has been exceptionally strong since the start of the year, and manufacturing has improved smartly,” the report argues. “The Bank of Canada’s latest Policy Report suggests that it is time to soak up some of the stimulus from the weak Canadian dollar and the low level of interest rates.”

BMO suggests, “Corporate spreads will not narrow decisively until there is clear improvement in the outlook for profits, and greater investor confidence in accounting standards. We continue to recommend the five-year area for Canadas.”