No data was found
CA-EN Investors

Is the Duration Trade Falling Apart?

January 22 to 26, 2024


Is the Duration Trade Falling Apart?

January 22 to 26, 2024

Weekly Commentary

Market Recap

  • Equity markets were mixed this week, but U.S. stocks powered higher with the S&P 500 closing at a record high. The index rose 1.2% on the week, led by a strong 4.3% rally in technology, while energy, materials and utilities lagged. The Nasdaq added 2.3% on the week and now almost 20% in the last three months alone.
  • Meantime, the TSX dipped 0.4% and continues to lag over the past three months.
  • As usual, it’s a story of little exposure to what’s working (tech), and a lot of exposure to what’s not (energy and materials).


Despite recent conflict in the Middle East, including the ongoing Israel-Hamas war and more recent attacks on shipping in the Red Sea and U.S. strikes on Houthis in Yemen, oil prices have held relatively steady. Frankly, we’re surprised we haven’t seen more movement—typically, we see some kind of oil shock when conflict flares up, though the spike in prices is usually short-lived. This time, however, the context is different; investors don’t seem to believe that the latest developments are material. This is likely because demand is coming off as a result of a gradually weakening consumer, meaning that potential delays are unlikely to upset the balance between supply and demand the way they did during COVID, when demand was higher. Additionally, oil supply isn’t particularly tight because not all OPEC nations are abiding by production restrictions and the U.S. is ramping up production. Looking at geopolitical risks more broadly, a number of important elections are coming up around the world, and as leaders change, so will alliances and trade relationships. The full impact of those potential shifts remains to be seen, but it is a situation worth monitoring.

Bottom Line: Periodic oil shocks are still likely throughout the rest of the year, but how long they last will likely depend on how regional conflicts evolve.


The U.S. consumer continues to hold up better than expected—last week, unemployment claims came in lower than anticipated, and the job picture remains fairly healthy as well. 2023 was a surprisingly good year for markets in large part because the consumer remained fairly strong, which helped prop up the economy. We think the same may hold true for this year. The primary difference between 2023 and 2024 is that last year, many consumers depleted their excess savings, meaning that this year, they’ll be doing their spending with borrowed money like credit cards and other loans. Higher interest rates will take their toll, especially later in the year, and we don’t yet know when rate cuts will arrive to provide a cushion. But broadly speaking, we believe consumers do have the capacity and credit to meet their spending needs in 2024. If spending does largely hold up, the only downside is that inflation will not come down as quickly, which then pushes out potential rate cuts.

Bottom Line: U.S. consumers remain resilient, and we expect that relative strength to persist.


Is there a risk that the entire duration1 trade—which many bond traders had been betting on prior to recent central bank comments—could fall apart? There’s always a possibility, but we don’t think so. Rate cuts are still likely to happen; the question is whether they will be concentrated in the second half of the year or if they will get started in the first half. We continue to believe that Q1 cuts are off the table, there’s a chance of cuts in Q2, and that cuts are likely by the end of Q3, both in Canada and the United States. As I’ve mentioned in this space previously, what happened was that markets priced in too many cuts too early. Investors benefitted off the duration trade in November and December before giving back a bit in January. As expectations get back to something more realistic, we’ll likely begin to see some movement in yields and the duration trade will continue to play out.

Bottom Line: We believe the duration trade will continue, which is why we currently have a slight overweight to duration with the intention of gradually increasing it over time.


For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Cracking the Fed’s Code.

2024 Outlook

On Wednesday, January 24, we’ll be releasing a special report and video featuring our outlook for 2024. It will include a recap of where markets are heading, risks and opportunities, as well as our team’s bullish or bearish ratings on bonds, dividends, and four specific sectors: Financials, Real Estate, Health Care, and Technology. Stay tuned to this space for more details on how you can access it.


1 Duration: A measure of the sensitivity of the price of a fixed income investment to a change in interest rates. Duration is expressed as number of years. The price of a bond with a longer duration would be expected to rise (fall) more than the price of a bond with lower duration when interest rates fall (rise).


The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.

For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.


Sadiq Adatia
Sadiq Adatia
Weekly Commentary
February 26, 2024
February 2024

How Nvidia Became the New Apple

As Nvidia’s stock soars, is it time to take profits or are there further gains to be found? What does the inflation gap between the U.S. and Canada mean for interest rates?
Monthly House View
February 22, 2024

The American Exception: How U.S. Markets Beat the Bears…Again

It was mixed news for markets, but it did provide the one thing we’ve been seeking for months: greater clarity
Steven Shepherd profile photo
February 22, 2023

BMO ETF Portfolios’ February Commentary: Rate Cuts See Their Shadow

January’s slow start turned quickly into a continuation of the fourth quarter’s “everything rally” in the U.S., as earnings season delivered above average upside earnings surprises.
February 22, 2024
February 2024

Commercial Real Estate Winter 2024 Market Update: Bricks, Clicks and the Pace of Change

Traditionally slow, commercial real estate now adapts faster to changing behaviors.
Weekly Commentary
February 20, 2024
February 2024

What’s Happening with Bonds?

What do higher-than-expected inflation numbers and slipping bond prices mean for the fixed income outlook? Will the A.I. rally continue, or will the optimism run its course?
Weekly Commentary
February 12, 2024
February 2024

Breaking Down China’s Stock Market Troubles

What impact will the recent selloff of Chinese stocks have on the outlook for Emerging Markets? How have labour markets managed to withstand recent layoffs?