rates
02. rates
We should all want bond yields to increase over the coming two years—it will mean our economy has recovered and is operating at its potential.
JUDGING INTEREST RATES: ALL RISE?
The monetary stimulus implemented by the Bank of Canada at the outset of the spread of Covid-19 back in March 2020 was swift and effective. The central bank’s two-pronged approach of reducing its overnight target interest rate (the so-called “policy” rate) to almost zero while embarking on a campaign of quantitative easing—in a nutshell, buying copious amounts of mostly federal government debt with the aim of supporting aggressive fiscal measures and suppressing longer-term interest rates—improved liquidity and encouraged participation in the market economy. Additionally—to far less fanfare—the Bank of Canada has consistently reiterated what it is calling “extraordinary forward guidance” as it commits to keeping its overnight rate at 0.25% until the economy returns to its potential and inflation is consistently back at its 2%-per- year target. With the Bank indicating that
its overnight rate will likely remain where it is until 2023, it is signalling to consumers, investors, governments, and businesses that short-term borrowing will remain cheap for another 2 years. Having said that, 5-year government of Canada bond yields, which tend to govern movements in fixed mortgage rates, have begun to creep upwards after plummeting from 1.64% before Covid-19 to as low as 0.32% in mid-2020. As of February 2021, for example, the yield on 5-year federal government debt was 0.73%—almost double the 0.41% in January 2021. It must be noted that this is still a near- historically low return on money that must be parted with for five years, riskless as it may be. For now and in the near-term, even with rates moving up as the economy returns to its pre- Covid-19 trajectory, money will remain cheap.
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