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GOLDILOCKS BOND YIELDS IN CANADA As the Bank of Canada and investors have piled into debt markets, the return on long-term Canadian bonds has plummeted. But hey, at least rates aren’t negative, right?
When Covid-19 hit industrialized countries in early 2020, there was no grand plan for how governments and central banks would manage the impending economic crisis; in fact, no one was quite sure there would even be an economic crisis. Alas, it soon became apparent that social-distancing restrictions and the effective mothballing of whole sectors was going to have devastating impacts on household and corporate finances if swift and dramatic action was not taken. Perhaps fortunately—though no one spoke of it in positive terms at the time—the Great Recession of 2008/9 provided a blueprint of what not to do when the economy takes a sudden turn for the worse. Back then, concerns over the lasting harmful effects of sky-high inflation and mounting government debt resulted in almost perverse austerity measures being enacted around the globe when what was needed was extreme stimulus. (To be fair, some central banks engaged in quantitative easing programs of a magnitude that had not been seen before.)
The sluggish “recovery” coming out of that recession yielded some lessons learned, and when it became clear one year ago that substantial financial relief measures were needed to ensure that a short-term illiquidity problem didn’t become a long-term solvency problem, governments and central banks acted. Concerns about growing government debt went by the wayside as central banks committed to keeping interest rates low for the foreseeable future. In Canada, the federal government has spent more than $250 billion supporting the economy, with the Bank of Canada providing the liquidity. This has depressed longer-term bond yields, with Canada’s 10-year government yield most recently sitting at under 1.09%. As low as this is by historical standards, it isn’t the lowest among other industrialized countries by a long shot, with Germany and France experiencing negative yields on this longer-term debt. Canada likely won’t see negative interest rates any time soon, though there also isn’t significant upside for yields in the foreseeable future.
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