[OptsyEagle]

Perhaps a little early to sound an alarm bell but 6 months ago the 10 year Cdn Government bond yielded 0.56% and today it is around 1.32%. US rates have risen in a similar fashion.

As we know, interest rate movements will eventually affect the stock market but probably worse, the housing market, which can derail banking and of course no stock market can hold up during a banking crisis.

Not trying to be a buzzkill but it is kind of interesting. I think we have a central bank talking about low interest rates for a few years and here we have more then a double in rates in 6 months. Does this foresee inflation? We all know this money printing has to create it someday. Right now my opinion is that productivity improvements have offset the effects of money printing to subdue inflation, but I doubt we can keep up this productivity gains forever.

Any thoughts?

 

[doctrine]

I am watching them. Seems like forecasts vary from end of 2023 to early 2024 for the first hikes. If this is communicated in advance then you would think we will start hearing talk by the end of this year. Stocks are already moving to reflect this new reality - utilities and consumer staples are moving towards 52 week lows actually, in a bull market. Very interesting. The US 10 year breaking 1.5% would be big news. I unloaded my utilities and have no consumer staples but if they keep hitting 52 week lows then I may become interested.

 

[sags]

The Fed can't raise interest rates or the economy will collapse, so they will buy the debt.

 

[OptsyEagle]

The big problem I worry about, but of course do nothing in response to, is this. Someday all this money printing/deficit spending will result in inflation. Tough to determine when because I believe it will happen when productivity gains start to slow down. WHEN it happens, interest rates will rise and the fed will not be able to do too much about it. Rates will derail housing, which will derail banks.

So far, anything that derails banks tends to result in the government coming in like a white knight and bailing them out. But, what does the government have to bail them out with? Deficit borrowing? Now wasn't that what caused this problem in the first place. Can a problem causer be used to solve the problem, using the same stuff (money printing by fed/deficit spending by government) that caused the problem in the 1st place? I doubt it.

All this debt will one day require a reckoning. Hopefully it is a generation after mine that gets to deal with it but that might be wishful thinking on my part. Last years deficit was mind numbing. I just hope we don't need to go there anytime during my lifetime.

PS: I did notice that GIC rates have ticked up a little. Nice to see for a change.

 

[Argonaut]

Inflation has already happened from all of this debt/money printing. You can see it in the inflation of asset prices -- stocks, real estate, etc. And you have little speculative bubbles here and there in SPACs, cryptocurrency, and so on.

The inflation hasn't trickled down as much to (misleading and outdated) indicators like the CPI. But that's because the average Joe hasn't had their wages increase, and they're just buying what they usually buy. And they're not buying these appreciating assets.

History doesn't necessarily repeat itself, but it does rhyme. And to me this smells like the stagflation of the 1970s. Commodities and hard assets are a good hedge for the investor. The average Joe is gonna get hurt no matter what.

What should the central banks and governments do? I don't have the perfect answer. But continuously inflating assets bubbles only makes the rich richer and poor poorer, and is kicking the can down the road. They should let natural economic cycles take their course, otherwise we'll have bigger problems in the future.

Now, I'm not oblivious to the virus and its effect on life in the last year. I'll save my take on that because it's a sensitive topic. But in my opinion the cure has been way worse than the disease.

 

[MrMatt]

Perhaps a little early to sound an alarm bell but 6 months ago the 10 year Cdn Government bond yielded 0.56% and today it is around 1.32%. US rates have risen in a similar fashion.

As we know, interest rate movements will eventually affect the stock market but probably worse, the housing market, which can derail banking and of course no stock market can hold up during a banking crisis.

Not trying to be a buzzkill but it is kind of interesting. I think we have a central bank talking about low interest rates for a few years and here we have more then a double in rates in 6 months. Does this foresee inflation? We all know this money printing has to create it someday. Right now my opinion is that productivity improvements have offset the effects of money printing to subdue inflation, but I doubt we can keep up this productivity gains forever.

Any thoughts?

That's a big jump, were do you watch interest rates.
Back of the envelope suggests a 1% increase to mortgage rates over the next 5 years, which I think many will find unaffordable.
That explains the recent talks about the housing market, if you want to downsize in the next decade, sell now!!

 

[doctrine]

Of course there is inflation and money printing. But you can't take advantage of that - it's already in the prices of assets like real estate, gold, cryptocurrencies, and growth stocks.

You either believe central banks will tighten, or they will never tighten. Of course they will tighten. And so everyone should be thinking what it will look like.

Smart money is already moving this way. You can see it in the interest rate trade. Go look at anything - utilities, consumer staples, bonds, insurance companies, rate-reset preferred shares, etc. Money is already positioning this way.

Fortunately for me, my re-opening/cyclical/value trade is also now an inflation hedge - just one more reason to own commodity stocks.

 

[like_to_retire]

That's a big jump, were do you watch interest rates.

I find the best place is:

Selected bond yields

View or download the latest data for bond yields, marketable bond average yields and selected benchmark bond yields.

www.bankofcanada.ca

Played with the chart and turned on only 10 year bonds and last 9 months time frame. See attached.

ltr

 

[OptsyEagle]

I guess I am wondering what is causing that upward spike?

I agree that forecasting future fallout is near impossible but it still seems interesting to see this kind of spike. Perhaps it was just because it was the least expected scenario, which is usually the one that end up happening in markets like this.

 

[like_to_retire]

I guess I am wondering what is causing that upward spike?

That's an easy answer - printing money with gay abandon.

ltr

 

[sags]

Unless Fed Chairman Powell is blowing smoke, I doubt the US will raise interest rates anytime soon.

What he said they will do is initiate QE and buy T-bills if interest rates get too high.

 

[AltaRed]

Agreed. The anticipation of inflation to come. Continued easy money WILL increase CPI as asset inflation trickles down.

The longer the central bank holds short term rates down, the higher the yield on 10 year bonds will go. BoC can't keep buying 10 year bonds indefinitely to push prices up (yields down) and when they throw in the towel, they will probably have to do so by boosting short term rates and taking yet more liquidity out of the system. It is not out of the question for short term rates to jump 1 percentage point in fairly short order, e.g. 2022.

 

[james4beach]

I guess I am wondering what is causing that upward spike?

Bond yields were depressed both because of the central bank action, but also because of the "flight to safety". Nervous investors were staying out of equities and other risk assets, and were hiding in bonds. That kept yields low.

Today, as you'll notice in the stock market, people are much more optimistic and much more in a risk-taking mood. So people are selling off the flights to safety. Bonds are becoming unpopular as people turn more bullish on stocks and more willing to take risk in general.

Inflation expectations are higher as well. Maybe 10 months ago it looked like we could be in a global depression and complete halt to the economy, so inflation was expected to be low, perhaps even negative. Today inflation expectations are a bit higher, with many people expecting a rebound to normal economy pretty soon.

It's very normal for bond yields to go higher during economic expansion periods, with a strong stock market.

That being said, most large corporations also have enormous debts and are affected by the rising 10 year yield. So bond yields can only go so high before they start being a problem for the stock market.

 

[nathan79]

As we know, interest rate movements will eventually affect the stock market but probably worse, the housing market, which can derail banking and of course no stock market can hold up during a banking crisis.

No worries... borrowers can handle much higher interest rates. Don't forget they had to qualify at the stress-tested rate of 4.79%. And of course mortgage brokers would never bend the rules, would they? Am I right??? .... crickets

Seriously though, housing is too big to fail, so there's no way the government won't try to prop it up somehow. They've already shown that they will do whatever it takes.

 

[Money172375]

No worries... borrowers can handle much higher interest rates. Don't forget they had to qualify at the stress-tested rate of 4.79%. And of course mortgage brokers would never bend the rules, would they? Am I right??? .... crickets

Seriously though, housing is too big to fail, so there's no way the government won't try to prop it up somehow. They've already shown that they will do whatever it takes.

I wish I could have bent the qualifying rate rule. That input field was locked down in the software I used As a lender. Qualifying was tough when I left a few years back. I have no worries about mortgage defaults. That being said, I rarely worked with first time buyers so I’m not up to speed on their financial situation.

 

[Ponderling]

A little while back (can't seem to locate the post) I suggested this house FOMO was not going to end well because bond yields would swell, and mortgage rates rise in turn.

So, tongue only partially in cheek, who is interested in kicking in 50K a piece to form a a syndicate?

We get together to buy foreclosed houses from the banks, slap some lip stick on them, and have a captive starving realtor work on a fixed salary of sale to sell them for us?

 

[nathan79]

I wish I could have bent the qualifying rate rule. That input field was locked down in the software I used As a lender. Qualifying was tough when I left a few years back. I have no worries about mortgage defaults. That being said, I rarely worked with first time buyers so I’m not up to speed on their financial situation.

Maybe it is as you say, but that begs the question -- who is buying in this market? If the median household income is 85K for example, then what size mortgage does that buyer qualify for at 4.79%, assuming they put 10% down? It's hard to know the financial situation of all buyers, but something tells me that average buyers are not getting mortgages for $600K condos or $1.2M houses, so it must be mainly the upper middle class and wealthy who are buying at current prices. And given the amount of activity in the market, there must be a LOT of them buying. These marginal buyers can keep the market going until they dry up, but I'm assuming there isn't an endless supply of such buyers. They will dry up eventually, and particularly if rates do start going up. And it goes without saying that lower and middle income buyers aren't going to jump in to fill the void unless prices start coming down significantly. That's assuming the government actually lets housing correct.

 

[Retiredguy]

And the youngins haven't seen just how ugly the housing market can get. c1980-81 my house went from 150K up to 275K over a period of 9 months then overnight back to ~150 and nothing was selling. Interest rates shot from ~11 up to ~19% and people were walking away from their homes in droves. Lots of business failures and job loss. Canada Savings Bonds paid 19.5% in 1981.

 

[Money172375]

Maybe it is as you say, but that begs the question -- who is buying in this market? If the median household income is 85K for example, then what size mortgage does that buyer qualify for at 4.79%, assuming they put 10% down? It's hard to know the financial situation of all buyers, but something tells me that average buyers are not getting mortgages for $600K condos or $1.2M houses, so it must be mainly the upper middle class and wealthy who are buying at current prices. And given the amount of activity in the market, there must be a LOT of them buying. These marginal buyers can keep the market going until they dry up, but I'm assuming there isn't an endless supply of such buyers. They will dry up eventually, and particularly if rates do start going up. And it goes without saying that lower and middle income buyers aren't going to jump in to fill the void unless prices start coming down significantly. That's assuming the government actually lets housing correct.

Down payment gifts from parents and new Canadians are fuelling it.

 

[Covariance]

If you look to the inflation break even spread (Treasury-TIPS) the market is forecasting higher inflation in the near term than long term. Atypical pattern. Normally inflation is procyclical - it is expected to pick up as the economy grows farther and farther away from the recession. Not what bond prices are predicting at the moment (at least in the US). But there is a perfectly logical explanation - supply shock. With a supply shock prices increase with lower quantities. IE inflation when the economy is weak.