Is the Top the Bottom?

While I hate making predictions, and often make fun of people who make predictions, I am going to throw one out there.

I think we may have put in a top on the Canadian 5 year bond yield for the cycle. Yep, I said it, and I said it publicly, so now everyone can come back and prove how wrong I can be in the future.

There is some strong evidence out to suggest that perhaps we have put in a top on bond yields for the cycle, which should mean we have put in a bottom on bond prices, and with it some of the suffering of the general population.

Last week we saw the yield on the Canadian 5 year hit a near 15 year high of 4.46%, and it has made a steady decline ever since. I said a couple months back that if we hit, and held 4%, then 4.50% looked pretty reasonable to zoom up to, and sure enough, we broke 4%, held 4%, and I would classify the move as a zoom from then up to the 4.50% range. The strong reversal from 4.46% down to 4.18% today has been just a violent, and just as ‘ zoomy’ if you will. The next area of resistance will be back at the 4% level. I don’t think we get straight back to 4%, but it will make for some interesting watching over the coming weeks.

As we witnessed the horrific attacks over the long weekend, it proved once again we live in an ever changing, and scary world. Volatility in the world is starting to seep over into volatility of the markets. Oil shot up on Monday, equity markets moved hundreds of points in a matter of minutes, and bonds have been on a teeter totter from the morning to the afternoon.

Before all the haters come out of the woodwork, I want to make it clear that I did not say rates are going down. There is a big difference between rates not going up, and rates going down. Until we get more clarity on a plethora of financial and government numbers, there is no reason for bond yields to drop. I personally believe that there is more downside risk to yields than upside, and I will point them out below.

Reasons the yield on bonds could drop:

Oil has dropped 10% in 3 weeks, unemployment has all been part time job growth ( never a good sign ) , The Russia Ukraine conflict is still going on, the recent Gaza / Israel conflict that re erupted over the weekend, inflated equity prices, bond prices that have lost 50% + in a matter of 18 months ( primed for a reversal to the mean ), Canadian GDP was negative last quarter, and it doesn’t look to be growing anytime soon. Bonds tend to act as an insurance policy. If we see further deterioration in any economic metrics, or we see more or continued geo political unrest, the safety of bonds will lure in buyers, driving yields down.

Reasons bond yields could go up:

Inflation could be stickier than we think, and force the BOC to hike Prime rate again. That is about it. The only reason that rates could tick higher is if inflation is stickier or higher than the BOC wants to see.

Again, not to say anything is impossible, but I truly believe the risk to yields is they can go lower, rather than higher over the coming months ( 3 to 6 months ).

Keep in mind though, that for yields ( and interest rates ) to drop, bad things have to happen. Rates tend to go up when good things happen, economies fire on all cylinders, and when things are working as they should. Interest rates and bond yields only really drop when things turn South or go sour.

Happy Brokering.