While everyone has been enjoying some amazing fall weather, the temperature isn’t the only thing heating up.
It appears that the bond market is taking its cue from Mother Nature and heating up as well.
While I would hate to go against the chorus of realtors claiming you need to buy now to afford a home, I must stick to my guns and introduce some facts. The last couple of weeks have poured cold water on the “real estate can only go up from here” theory. Let’s explore.
For those who track bond yields, you might have noticed the line is moving in the opposite direction. Just when everyone knew that rates had to go lower, the 5-year Government of Canada yield is up 33 bps in two weeks. Everyone knew rates were only going to fall. Sorry to burst the bubble, but rates can move in both directions—especially when you least expect it.
Are the bond vigilantes finally taking control? Maybe. Is Mr. Market finally demanding proper return for the risk they’re taking? Maybe.
Why the sudden change?
So, why did this happen?
The U.S. economy, which had been all but written off two weeks ago after Jerome Powell and Co. rode in on their 50-bps rate-cutting horse, appears to have had a fire lit under it.
The U.S. employment numbers were released today, and beyond strong is an understatement. Job creation is firing on all cylinders, and the data that seemed to justify a 50-bps cut a few weeks ago could now be seen as a reason to raise rates by 25 bps.
That doesn’t mean I’m predicting the Fed will raise rates, but if we see another jobs report like today’s next month, further Fed cuts will likely be off the table for the rest of the year.
Based on the employment report, bond yields shot up like a rocket this morning, and the CAD took a hit with the reduced likelihood of further Fed rate cuts this year.
For those eyeing the next BoC meeting, the odds of a 50-bps cut have become much slimmer today. While a 50-bps cut is still possible, a 25-bps cut is looking more likely. Of course, there’s still a lot that could change before the October 23 meeting, especially with this week’s Canadian employment report.
Housing market faces new challenges
While monetary and fiscal policy are duelling it out, there’s also the uncomfortable truth about the housing market.
Every month, when we get data from local realtor boards, the numbers are not fantastic and, in some cases, downright bad.
Remember when there was no supply? Well, we’ve fixed that little problem, haven’t we? Now, the issue is too much supply. Months of inventory are growing at a fast pace, right when rates are rising, and unemployment in Canada is increasing. This combination isn’t exactly a recipe for success but rather the ingredients for a tough market if you hold a real estate license. Too much supply, expensive money, and fewer jobs are not the answer.
Why brokers shouldn’t bet on lower rates
Given the rising bond yields and potential economic impacts, it’s important for brokers to keep a realistic view of what’s ahead.
Be careful on suggesting the variable-rate mortgage, and please don’t get caught up in the “rates have to go lower” mantra. Yes, rates should come down as the economy gets worse, but there is never a guarantee.
For instance, Hurricane Helene recently devastated much of the Southeast U.S., which will lead to massive rebuilding efforts. This increased demand for materials like lumber, plywood, and concrete will drive prices up—and those price hikes won’t be limited to the U.S. Canada could see the same effect. The rebuilding will also boost U.S. GDP and job numbers, potentially fuelling inflation in the coming months.
For those of you thinking, “Ah, that’s an American problem”—think again. A strong employment report out of Washington today pushed the Canadian 5-year bond up by 14 bps this morning, despite the Canadian economy circling the drain. Inflation in the U.S., and possibly in Canada, may not have disappeared but could simply be lying dormant. With hundreds of billions of dollars set to go into rebuilding efforts, supply and demand dynamics will likely get disrupted, which generally leads to inflation.
Watch the data, assume nothing, and keep your ear to the ground for what happens, both at home and abroad. If we start to get bond markets that start pricing in higher fixed rates, then we will see a re-adjustment of the yield curve, interest rates, and currencies.
It’s never pretty when billions of dollars in exposure need to be re-balanced at the capital markets level. For now, the yield increases of the last few weeks may just be a flash in the pan.
This is an abbreviated version of a column originally posted for subscribers of MortgageRamblings.com. Those interested can subscribe by clicking here. Opinion pieces and the views expressed within are those of respective contributors and do not represent the views of the publisher and its affiliates.
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Last modified: October 7, 2024