rates
02. rates
You can officially stick a fork in the period of monetary tightening that lasted from mid-2017 through 2018, with the cost of borrowing now falling fast.
THE 5-YEAR GOVERNMENT BOND YIELD: A RATE OF INTEREST
Typically, a growing economy is complemented by rising prices and predictably-increasing (or higher-than- average) interest rates. What is historically unusual, but the de facto new norm, is that despite Canada’s economy having been growing almost uninterruptedly since the trough of the 2009 recession— accompanied as you might expect by consistent, within-target inflation—interest rate inertia is to the downside. This applies to both the short-term and long-term variety, whether policy-based or market-determined. The key features of our recent economic experience are that 1) our economy’s potential growth path is much lower than it was in past decades (due in part to an aging population and a lack of sustained productivity gains), and 2) there is a great deal more uncertainty about what the future holds for both the national and the global economy, largely due to the evolving global health crisis.
Indeed, the emerging response to the spread of the coronavirus, combined with concerns about oil supply disruptions, and the impacts of trade wars (and real wars), is creating a flight to safety in the part of investors. In other words, bond markets are attracting significant capital inflows, which is serving to bid up bond prices and thus push down bond yields. Lower-yielding government bonds mean cheaper fixed-rate mortgages, which will stimulate housing markets across Canada (including, or maybe especially, in Metro Vancouver). The Bank of Canada has already lowered its trend-setting short-term policy rate in an effort to avoid recessionary conditions later this year. Now, with the economy’s path forward being uncertain, we are certain that even-lower bond yields—and hencemortgage rates—will be achieved in 2020.
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