Fund manager Devlin Capital Inc. is getting ready for further steepening in the yield curve in North America’s two largest economies as governments run large

budget deficits to pay for tax cuts, military projects and other priorities.

Founder Ed Devlin , formerly Pimco’s head of Canadian portfolio management, said both countries will see a flurry of long-dated bond issuance, even as their central banks run easier monetary policy. The United States Federal Reserve trimmed rates again Wednesday while the Bank of Canada held its overnight rate at 2.25 per cent, the lower end of what it considers “neutral” monetary policy.

In Canada, Mark Carney’s government released fiscal projections last month that foresee an additional $167.3 billion in deficits compared with previous forecasts over a five-year period. The extra borrowing is partly to accommodate spending on defence, housing and infrastructure.

“If the government is at all effective in trying to implement their investment plans, the supply will either come from the government or it’ll come from the private sector, but with subsidies from the government,” Devlin said.

That suggests yields on longer-term bonds will either rise faster than, or fall less quickly than, short-term rates, causing the curve to steepen.

The firm has also made a “tactical” trade in Canadian five-year bonds , which sold off sharply after surprisingly strong data on the economy. “Five-years, just in the last two weeks, got super cheap on the curve,” Devlin said.

Devlin spent nearly 15 years at Pacific Investment Management Co. until leaving in 2020 and starting his own firm. Last month, Devlin Capital landed its first asset-management client when it received a mandate from Canadian Imperial Bank of Commerce to act as a sub-adviser on the CIBC Canadian Fixed Income Private Pool Fund.

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