U.S. Treasurys are set to outperform Canadian government bonds, suggests independent investment research firm BCA Research.

It notes that Canadian 10-year bonds have handily outperformed U.S. Treasurys since 2003. “A major factor driving this trend was a surging Canadian dollar. The strong currency both encouraged foreign inflows and kept investors nervous regarding its impact on the Canadian economy,” it explains.

“Indeed, employment momentum started turning in favor of the U.S. in early 2003. As a result, U.S. relative to Canadian yield spreads widened to the biggest margin in history. Very recently, the spread has started to narrow, and we expect there is more to come,” BCA says.

“A consumer slowdown in the U.S. will help Treasurys to rally. Meanwhile, the recent upturn in Canadian employment relative to the U.S. should continue, suggesting that Canadian bonds will underperform U.S. Treasurys in the coming quarters,” the firm counsels. “On a currency-hedged basis, favor 10-year Treasurys relative to Canadian 10-year Government Bonds.”