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The Bottom is Zero

If someone ever tells you that bond yields won’t go lower, ask if they’re at zero yet. If not, yields can go lower.

Take our good friends in Germany, for example. Their 5-year government yield recently tumbled to an unthinkably low 8 basis points (0.08%). By contrast, Canada’s 5-year yield—which guides our fixed mortgage rates—is at 1.48%.

Germany and Canada are far from identical cousins economically and geopolitically, but that’s beside the point. The takeaway is that subdued growth and inflation can pound yields to the ground (long term), a scenario that Canada is not immune to.

“Against a background of ongoing geopolitical uncertainties and lower confidence, energy prices have declined and there has been a significant correction in global financial markets, resulting in lower government bond yields,” the Bank of Canada said last week. But that’s just the latest justification for Canada’s abnormally long stretch of low rates, one that would have been inconceivable a decade ago.

Like Canadian economists, German prognosticators have been on the wrong side of this trend for years. Despite repeated predictions of a rebounding economy and central bank tightening, rates have sporadically soared for a few months, only to skid right back down to their lows.

Slowly but surely, economists are growing averse to being repeatedly wrong. Some are finally coming to the realization that depressed rates may be here to stay. The “experts” are pushing out their rate hike forecasts and slashing their “neutral rate” estimates.

The chief risk for bond yields is that they remain low for long,” BMO economist Benjamin Reitzes told Bloomberg last week. That certainly seems to be the fate for Germany, where 5-year fixed mortgage rates are as low as 1.25%.

Someday we’ll see 5-year fixed rates at 1.99% or less in Canada as well. Few can envision it, but we’d be foolish to bet against it.

German bond chart source:

German mortgage rate source: Peter Kleinwächter

Rob McLister, CMT