With bond yields on the rise globally, a previously unremarkable aspect of finance has become a major point of discussion on Wall Street. This shift impacts the average Canadian by leading to increased borrowing costs for certain products like mortgages and auto loans, while also resulting in stronger returns for investments such as guaranteed investment certificates (GICs) and money market funds.
When an individual purchases a bond, they are essentially loaning money for a specific period to the bond issuer, which could be the government, provinces, municipalities, or a private company. Investors typically receive interest payments until the bond reaches maturity, at which point they receive the bond’s face value.
Bond yield refers to the annual return an investor receives from holding a bond, expressed as a percentage. Following bond issuance, they can be traded on the open market, causing their prices to fluctuate. When bond prices decline, yields increase because investors receive the same interest payments for a lower purchase price.
Historically, the global bond market was relatively calm as central banks worldwide maintained near-zero interest rates for over a decade post the 2008 financial crisis. However, an increasing number of investors now anticipate upcoming rate hikes as central banks seek to curb persistent inflation.
Raising interest rates by a central bank leads to newly issued bonds offering higher returns, thereby diminishing the value of existing lower-yielding bonds.
Presently, the bond market is witnessing a significant global sell-off, with yields hitting multi-year or multi-decade peaks in countries like the United States, Germany, Japan, and Canada. This surge is attributed to inflation concerns and mounting government debt, fueling expectations for central banks such as the Bank of Canada to raise their benchmark interest rates.
Canada’s recent inflation uptick was primarily driven by surging gas prices, exacerbated by persistent high global oil prices and disruptions in crude traffic due to ongoing geopolitical tensions, notably the U.S.-Iran conflict. These factors are influencing expectations of future interest rate hikes to combat inflation.
The rise in Canada’s 10-year government bond yield to a two-year high indicates escalating inflation risks, impacting lending rates set by Canadian banks. Higher government bond yields establish a baseline for interest rates on various forms of credit, including fixed-rate mortgages and auto loans. Moreover, rising bond yields prompt banks to elevate their GIC rates to attract investors seeking guaranteed returns.
True North Mortgage’s founder, Dan Eisner, advises borrowers to secure fixed mortgage rates promptly due to the current market volatility. He suggests that until economic conditions stabilize and inflation pressures alleviate, fixed rates are likely to fluctuate.
Google Trends data reveals a substantial surge in Canadian interest in the bond market upheaval, with inquiries on the topic skyrocketing by 5,000% year-over-year.
Although Canada’s bond market has experienced some impact from global yield increases, the country’s yield curve remains below that of U.S. government bonds. Bank of Canada officials emphasize that while Canada’s bond market is influenced by global trends, it remains stable and not in a precarious state, distinguishing between market volatility and instability stemming from leverage unwinding and liquidity issues among investors.