So it's not just me, then. Since Stephen Poloz took the reins at the Bank of Canada almost two years ago, I've written a number of blog posts questioning his approach to the job. But I'm no longer in the bond business and I'm not a big institutional investor, so I don't suppose the Governor has lost much sleep about it.
Ed Devlin just might be a different story. The fixed income manager at investment giant PIMCO has told Bloomberg that he's getting out of Government of Canada bonds because of the unpredictability of Poloz's public policy pronouncements.* The knock on Governor Poloz -- and Ed Devlin (and I) are not alone in thinking this -- is that he announced last year that the Bank would no longer be providing "forward guidance" to markets about the likely direction of interest rates. However, he seems to honor this approach as much in the breach as in the observance.
The fact that the market was surprised by the Bank's rate cut in January certainly speaks to the absence of any clear policy signals. However, Poloz's subsequent comments initially led markets to expect a further rate cut in March, but then changed tack to indicate that the Bank would prefer to wait to assess the effectiveness of the January move. The Bank stood pat in March; now, the market consensus seems to be that there may not be any further rate cuts by the Bank, though some analysts still expect a further reduction as early as April.
Not that "forward guidance" is the key to a harmonious relationship between central banks and bond markets. Just ask Poloz's predecessor as Governor, Mark Carney, now plying his trade at the Bank of England. Soon after moving to London, Carney introduced guidance to the Bank's armoury. Specifically, he indicated that the Bank would closely monitor the UK job market, and would consider moving interest rates higher once the headline unemployment rate slipped to 7 percent, on the assumption that such a jobless rate would likely be accompanied by rising wage pressures.
The Bank of England's own forecasts when Carney made this announcement suggested that employment growth would not trigger a rate hike for several quarters. In the event, however, job growth turned out to be much stronger than the Bank had anticipated, and markets began to price in a rate hike more than a year ago. It still hasn't happened: wage pressures in the UK have remained well-contained, and now, of course, the fall in oil prices is pushing inflation ever lower. "Forward guidance" is now a discredited concept in the UK, and Carney's relationship with parliamentarians and pundits alike has yet to recover. It's possible that Gov Poloz had Carney's UK experience in mind when he dropped forward guidance from the lexicon in Canada.
So what are we to make of Ed Devlin's decision? It may be that he's trying to re-elevate PIMCO's profile, which has taken a knock since the departure of the eccentric but influential Bill Gross and the ubiquitous Mohamed el-Erian. After all, Devlin isn't getting out of Canada altogether: he claims he sees better value in provincial bonds and bank paper. Those certainly yield a bit more than Canada bonds do, but if Devlin is looking for a peaceful, less volatile existence, they're surely not the place to hide. By far the biggest determinant of the yield on such "spread product", and the biggest driver of day-to-day price movements, is .....the performance of Government of Canada bonds!
*Unless Ed Devlin is the world's worst bond trader, and I'm certain he isn't, the Bloomberg article should say that he's "got out", not "getting out". If you're as big a player as PIMCO, you can't tell markets in advance what you're planning to do, unless you want to lose money.
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