Economic Headwinds Drive Down Yields

Canada is flying into considerable global economic headwinds. At least that’s what fixed-income traders (the people making big-money bets on rates) think.

Traders have pushed down Canada’s benchmark 5-year bond yield to 2.46% on a variety of concerns. That is a four-month low.

The thick black line on the chart is a 50-day moving average of yields and we’re well below that average at the moment.

Among other things, Canada’s bond market is reacting to:

• A weaker U.S. economic outlook from the Fed
• Record-low U.S. home sales
• Benign inflation (1.8% versus the BoC’s 2% target)
• European credit default risk
• U.S. unemployment
• Weak Canadian retail sales
• Investors’ appetite for risk-free assets (govt. bonds)

Yet, despite all the above, fixed-income traders were still pricing in a 73% chance of a 25 basis point rate hike on July 20 (as of yesterday). If they’re right, that would lift prime rate (and variable mortgage rates) accordingly.

Fixed mortgage rates will continue to be guided by bond market. Currently, the 5-year yield is riding just above major long-term support in the 2.40% area. Most expect it to bounce off these levels but, as always, one never knows what news tomorrow will bring.