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“We Can’t Go Any Lower”

Rate-Bottom That’s the opinion of Eric Lascelles, chief economics and rates strategist for TD Securities. 

Lascelles was referencing the Bank of Canada’s all-time low 0.25% overnight target rate in his quote. 

Canada’s most important banker, Marc Carney, seems to agree.  Last week on BNN he said rates were at the "lowest possible level.” He said going from 0.25% to 0.00% is not an option because it would cause technical problems with the functioning of the money market.

Most now see two possible outcomes from here: sideways or up.

If inflation stays at bay, our current sideways interest-rate market could last up to 14 months—the duration Carney hopes to keep the Bank of Canada rate steady. 

On the other hand, an uptrend could start as soon as the bond market anticipates a recovery.  Bond yields have historically risen well in advance of economic recoveries.

Interestingly, very few people are predicting an imminent jump in bond yields.  They feel it’s too unlikely with Canada’s GDP shrinking at the fastest pace on record

Nonetheless, a short-term yield increase can happen for many reasons besides economic output and inflation.  There can be technical reasons (e.g., technical analysts see a nice double-bottom on yield charts right now), supply reasons (if the government issues new debt to finance its activities), and asset allocation reasons (i.e., investors moving out of bonds to higher returning alternatives). 

Because of these factors, we’re keeping an eye on the 5-year yield.  If it breaks above 2.10 to 2.15% there is always the chance it could pull fixed rates up with it.