Bold opening: A seasoned ex-Pimco strategist bets on a steeper yield curve in North America, betting that borrowing costs longer out will rise even as policy stays generally accommodative.
Devlin Capital Inc., led by founder Ed Devlin who previously ran Pimco’s Canadian portfolio desk, anticipates heightened long-dated bond issuance in the United States and Canada. This comes despite central banks continuing to lean toward easier money. The timing: governments in both nations running substantial budget deficits to fund tax cuts, military spending, and other priorities, which typically pushes longer-term yields higher as supply expands.
In practical terms, Devlin suggests the yield curve should steepen because investors will see more long-term debt entering the market while policy rates stay anchored near the low end of neutral. On the policy front, the U.S. Federal Reserve cut rates again recently, signaling continued accommodation, while the Bank of Canada maintained its overnight rate at 2.25%, the lower edge of its neutral range. This combination of robust deficits and steady, softer monetary policy reinforces the bet on higher long-term yields relative to shorter maturities.
If you’re new to this idea, a steeper yield curve means longer-term bonds offer substantially higher yields than shorter-term ones, often reflecting expectations of stronger growth, higher deficits, or inflationary pressures ahead. Devlin’s view hinges on two forces aligning: supply growth in the long end of the bond market and ongoing monetary ease that avoids suppressing those longer yields.
But here’s where it gets controversial: not everyone agrees that deficits alone will push long rates higher, as other factors—such as technical demand for duration, global capital flows, or unexpected inflation—can dampen or reverse the move. And this is the part most people miss: policy surprises or shifts in risk appetite can quickly flatten or invert parts of the curve, even with fiscal expansion in place.
Ultimately, Devlin’s stance underscores a broader theme for North American fixed-income investors: balance the allure of attractively priced long-term debt with the unpredictability of policy signals and global demand. Which side do you think will dominate in the coming quarters: persistent deficits driving higher long yields, or factors that keep long rates anchored despite fiscal expansion? Share your perspective in the comments.
