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.

5-year-yieldThe 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:

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.

  1. As usual great info to pass along thanks Rob; As I commented to a client just a minute ago; “I guess the sky isn’t falling just yet”. I’ll be looking forward to seeing what the “experts” say in the coming days re the July 20th BOC announcement.

  2. What the Bond market is telling us very clearly (its almost like a flashing neon sign) is that the future is not looking very rosy and that we are very likely to enter a double dip recession, no matter what ‘temporary stimulus’ did for GDP the past couple of quarters. As all that temporary money comes sailing out of the economy and as HST and other tax hikes take effect, along with growth slowing in Europe and flatlining in the US with still falling house prices, it doesn’t take a wonderkid to figure out that Canada will be hit hard too. All the ‘experts’ who said we’d escape the last recession were wrong back then. This time in 2011, I think the world will look pretty desperate, economically and central banks will be falling over themselves to cut rates once again, except for those that are still at 0 or close to it.
    Time to play defensive in anything remotely connected to the economy.

  3. If the economy doesn’t gain traction once the fiscal stimulus subsides then we’ll find ourselves facing down from the top of another roller coaster ride.
    The BOC will need tools other than rate hikes to succesfully navigate our Canadian economy through the next few quarters.

  4. Thanks Scott. The market sure does love to make the experts wrong. It’s especially good at changing market sentiment on short notice. The last eight weeks have been a perfect example!
    Cheers,
    Rob

  5. You read that much into the 5yr GCAN Bond rates? The only conclusion I draw is the rate’s floating average is stabilizing around the 2.5% mark which makes for continued cheap money, historically speaking for some time to come.
    As for stimulus money, it barely made an upward dent in the economy so I hardly think that removing it is a going concern and since the Canadian stock market is still holding near its recent 52 week peak, I would hardly conclude that the markets are telling of another recession. Just my thoughts!

  6. 5-year Cad bond yields have hit 2.35%, their lowest since the midst of the crisis in spring 2009!
    What are the banks waiting for? Shouldn’t we be seeing posted mortgage rates closer to 5.5% at most?

  7. “5-year Cad bond yields have hit 2.35%, their lowest since the midst of the crisis in spring 2009!”
    You must be incorrect. We were informed back in April/May that rates imminently had nowhere to go but up and anyone who said otherwise was a fool no matter what their reasoning, and if they turned out right that just meant they were lucky.
    Interesting that the banks were pushing so hard to get us out of variables and locked into 5 year fixed a few months back, no?

  8. So true … so true … goes to show, that when everybody in the market things that something’s going to happen, it doesn’t mean squat unless it actually happens.
    The 5-year CAD bond yield is now down 85 basis points from where it was in April … that’s right, an 0.85% drop in two months. Mortgage rates should be at most the same level that they were at in those rock-bottom days of March/April.
    Let’s not forget folks, Japan’s 5-year yield has been under 1% for many years … and the possibility that the US is going that way is looking more realistic by the day. And Canadian yields tend to track US yields pretty closely.

  9. Hi FWTTB,
    You raise an excellent point of discussion. Our position is that one cannot predict the unpredictable. Studies have shown time and again that virtually no one can consistently and accurately forecast rates long-term. If someone wants to attribute being right to skill or luck, that’s his/her prerogative…
    On your last point: Banks probably did oversell fixed rates to the public, but they could not have foreseen the dramatic drop in yields since April 21. The bond market doesn’t take it’s cues from the banks, but rather from the consensus of millions of global players.
    Cheers,
    Rob

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