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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.
 

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I think one of the best things us fixed income investors can hope for right now is a powerful mania in stocks & risk assets.

If speculation in tech stocks & bitcoinz goes nuts, it should suck money out of bonds and into risky gambles. That will drive interest rates up.

I was worried that we'd be stuck with 0% yields in fixed income for a long time to come, but that's clearly not the case, which is great news I think.
 

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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.
It's also possible that the bond market is looking at the current situation with speculative manias, and figures that the Federal Reserve will be forced to raise interest rates and/or reduce their QE stimulus.

The crazier the GameStop/Bitcoin gambling gets, the greater the chance the Federal Reserve will tighten.

Remember that at this point, even just the Federal Reserve 'easing off' on the amount of stimulus is equivalent to tightening. The market is absolutely addicted to central banks flooding money into the market.

Beware: the S&P 500 is also addicted to Federal Reserve stimulus.
 

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The US 10 year bond just fell off a cliff. If you look at the 10 year treasury note you can see that something very significant happened to it today.

This should get interesting. Notice that the stock market isn't thrilled about it.
 

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GIC rates are starting to look better. Here's the current view at iTrade... already these interest rates are higher than a week ago.

I expect these rates to increase in the coming days. There is usually a lag versus the bond market.

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and for anyone who is familiar with the banking business knows where all that GIC money is mostly lent out...mortgages. If one goes up the other will almost always follow.

Luckily for now, these moves are not overly significant but they do deserve watching.
Yeah, it will be interesting to see how far rates increase. I think the stock market is starting to get nervous about higher interest rates.

One thing I always kind of laugh at is how people tell me my fixed income investments are dangerous, because interest rates "have nowhere to go but up". And... that makes stocks safer?
 

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I also wonder if this current move is really just a move from "abnormal" to "more normal" but like all moves the answer is only known after it is all over.
Could be a million different things going on. But I might make myself a drink tonight and head over to CNBC to see what the talking heads are flapping about.

Maybe everyone is selling their bonds and buying bitcoin instead, since it's the future. lol
 

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... I'm looking at your chart. Does iTrade just start with a 2 year term (ie. don't offer 1 year 'cauase Scotia Mortgage at .45 for 2 years is like "why bother"?
I clicked Compounding Annual GICs. I think this view doesn't show 1 year since compounding doesn't apply. I only ever buy 5 year GICs myself, so this table is showing compounding rates sorted by the 5 year rate.

My guess is that in the coming days/weeks these rates may go higher by 10 basis points
 

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Interest rates are still going up, and the stock market doesn't seem to like it.

At what point do we have to start worrying about the real estate market? The main reason home prices go up are low interest rates, and continuous interest rates cuts. I never bought the stories about foreign buyers/speculators being responsible ... I really think that low interest rates have fuelled the RE bubble.

This summer, when interest rates were slashed, I saw 3 friends go out and buy homes. For one, it was the couple's first home. For another one it was the man's second home, a second property he bought for fun! He was able to get a 1.0% mortgage from HSBC and said he had to buy.

The bond market seems to be forecasting somewhat higher interest rates and inflation to come. My guess is, if rates go high enough, this whole RE market collapses.
 

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I'm no expert but I don't think rates will keep moving higher and higher.
Then you probably don't want to be in stocks or real estate.

I thought you were very bullish on stocks though, especially on the high risk growth ones? How can you simultaneously be projecting stocks going up, and interest rates going up too?
 

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Will the Fed control rates ? Keep them at certain thresholds ??? Or let things just go - we will see...
In case anyone is curious, I outlined a worst case scenario here (bond carnage) in bond ETFs


If something like that happens, people will really feel the pain. There are many investors holding bond funds who believe they are quite stable... and they are, compared to stocks... but there is still the potential for sharp volatility.

My own guess... I don't think the drawdown would be as severe as 15%. We are currently a bit under 6% loss.

The American fund IEF, which is kind of 'ground zero' for what's happening now, is around 7% loss.
 

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Lastly, most bonds are an asset allocation to give some form of offset or dilution to ones stock portfolio. So when one is loosing money in bonds, they usually are making it hand over fist in the stocks. It is probably a good thing.
I agree with all your points @OptsyEagle and it's very true that risk-averse investors are spooked more easily by volatility. Bond investors get nervous at normal volatility. I actually think that the financial media tries to exploit this, because you will notice that they do a lot of fear mongering when bonds decline a little bit. I suspect it's a trick fund managers use to attract money away from conservative investors.

Your last point about the role in asset allocation is really worth emphasizing. This is so important, and took me quite a few years to grasp ... the goal in a diversified portfolio (asset allocation) is NOT to constantly make money in everything you hold. That's an unreasonable expectation. Instead, the goal is to have some asset that's performing well, when another is performing poorly.

In the last 6 months, stocks are up about 14% and bonds are down 4%. This is perfectly normal and it's desirable. It's good to see that these assets are uncorrelated, because this is the key trait which makes diversification and asset allocation work.
 

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Should equity investors be worried of rising interests rates?
Now try an analysis of the forward 10 year return of a bond fund from each of those dates. e.g. from 6/2003 (the longest rate rising cycle shown in that table) IEF returned 5.3% CAGR

I think you'll find that the forward 10 year return is quite good, even when you start during those "prolonged periods of rising rates"

The way rising rates tend to hit a bond fund is, initial volatility and maybe no returns for a while, until the bonds roll over at higher yields and boost the returns.
 

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The more serious "rising rate" scenario was in the 1970s. The analysis posted above looks at a period where interest rates were trending downward, with only short stretches of rising rates.

Here's the period we should worry about more.

Rates went up significantly from 1972 (start of available data) to 1983. Stocks did absolutely terribly, first crashing with a 46% drawdown, and had a 6 year stretch of 0% nominal returns (with very negative real returns).

Even 10 years later, in 1982, stocks still had a 0% real return... had actually lost in real terms, even after a decade.

People conveniently forget about stocks in the 70s. Bonds had a negative real return too, but as you can see in the chart, were much more stable and in fact, bonds outperformed stocks during the high inflation 70s. On a risk-adjusted basis, bonds were a much better investment while rates shot up in the 70s.

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The Bank of Canada released a statement on its strategy going forward, how it's going to handle stimulus

The roadmap laid out by Macklem is consistent with what economists and markets have been anticipating -- a final taper later this year to bring net purchases of bonds to about zero, followed by a first rate hike later in 2022. Swaps trading suggests that investors are pricing in a 100 per cent chance of a hike over the next 12 months. Three hikes over the next two years are fully priced in, which would leave Canada with the highest policy rate among Group of Seven economies.
Notice what the derivative market already believes. The market is expecting several rate hikes over the next two years.

 

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Bonds seem to be falling swiftly now, and yields are rising.

Maybe interest rates are finally going up? Not the central bank overnight rate (yet) but the rest of the yield curve seems to be moving higher.

Would be excellent, if it happens.
 

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These bond yields are going to start getting pretty juicy. Already the XBB yield-to-maturity is over 1.7% which is much higher than any savings account you'll find in the country.
 

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According to this Bloomberg article, here's what happened in today's BoC announcement. You can find more articles at bnnbloomberg
  • the BoC ended its government bond-buying stimulus program (QE)
  • suggested the BoC may increase the policy rate sooner than earlier thought
  • still pledged to not raise the policy rate until the recovery is complete
The derivative market is pricing in five x 0.25% rate hikes next year... wow. So the market really thinks the BoC is going to tighten soon, by more than 1% ? Really?

The rate is still 0.25% today

Notice they are saying they will not dare raise interest rates until the recovery is "complete". And what does that mean?
 
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