Rise Up

The title seemed appropriate after the Easter weekend. I am talking about interest rates of course. It seems that the Canadian bond market has a spring in its step these days.

After seeing rates bounce around at a lot lower level for most of Q1, it appears the bond market has found new life. After hitting a low around 3.26% in January, we finished off today’s session at 3.63%, after an intra-day high of around 3.66%.

Contrary to what some pundits are telling you, I don’t think the sky is falling, but it might also be a good time to get your pre approvals in, get your rates locked in, and maybe reach out to any variables clients to see if they want to convert to a fixed rate now.

Monday and today were the worst 2 days we have seen in equity markets in quite some time. The Dow Jones, the S and P 500, and the tech heavy NASDAQ all took it on the chin. Now of course, perspective matters, and those indexes are coming off their best Q1 returns in about 6 years. So, Monday and today was probably a bit of re balancing – and that spills over to the bond market. Every quarter a lot of professional traders, hedge funds, pension funds, and insurance companies rebalance their portfolio. Since Q1 is in the books as of Thursday ( Friday was a holiday ), a lot of traders are repositioning their portfolios – and that always leads to volatility. We are seeing bond rates up, and equity markets down – and a lot of that could be based on the calendar rather than the fundamentals of a market. Yes, rates have gone up a lot in the last 2 or 3 trading sessions, but that could just be portfolio shifting, and could normalize in the coming days, and weeks.

The second reason that I think fixed rates are heading up is just the current pricing. I have said it what seems like a million times, but why not say it again ” I don’t think rates will come down as much as everyone thinks”. Yes, rates should come down this year, but I think it is a late Q3 or early Q4 event, and I don’t think they come down like everyone thinks. As we know, or should know in our business, fixed rates tend to front run the BOC overnight rate. If the market thinks Tiff and Co will drop rates in 3 months, the 3 yr, 5 yr, 10 yr etc will start moving down today. Plain and simple – fixed rates had a substantial discount baked into them – and now the market is thinking maybe it was too much too fast. Tiff himself has said, on numerous occasions that they will hold rates until they see inflation sustained at 2.00%, or at least close to that mark. We are nowhere near that. The Federal Reserve has also said they only see 3 cuts this year, even though 90 days ago they saw 8. By June of this year, could 3 be down to 1, or 0? Not out of the question.

A simple bit of math tells you something was wrong. For an insured VRM, you were looking around Prime -.70%. That would give you a rate around 6.50%. A 5 year fixed could be had for 4.99%, so that is 151 bps difference. In order to get 151 bps down on the Prime, you would need about 6 cuts ( 6 cuts at 25 bps a piece ). Now, You might get one or two cuts this year, and maybe 3 in 2025, and then a couple early in 2026, but keep in mind that 2 years from now, even if you get 6 cuts to bring the VRM down to the fixed, you still overpaid for the first 6 months by 151 bps, then 101 bps for another 3 or 6 months, then 76 bps, etc. etc. In order for the VRM to balance out with a fixed rate at 4.99% you would need somewhere around 10 rate cuts ( depending on the timing of said rate cuts of course ) and I really don’t think you would see 10 cuts – for a total of 250 bps over the next 5 years. Yes, rates will go down, but not by that much. If Uncle Tiff got 10 rate cuts in, he would re ignite the smoldering housing market, and we would be back at square one. All that pain for nothing.

Simple math in the market was telling you that the fixed market had baked in too many rate cuts too soon, and so it is righting the ship, and easing those rates in the fixed market back up. This is bond arbitrage 101. I am not here to say fixed rates go to the moon, but yes, I think you could see a 5 year fixed settle right around the 5.49% ish range before the bond market thinks we are back in balance.

Another reason we are seeing fixed rates creep up is politics. The Liberals will unveil their budget on April 16th, but they are already pre announcing spending like it is tickets to a Taylor Swift concert. Yesterday it was a billion dollars of spending. Today’s announcement was 5 billion or 6 billion. Hell, by the time April 16th gets here they will be have spent 100 billion before budget day. The problem with all this spending is, WE DON’T HAVE THE F*CKING MONEY!!!! That’s it. The government doesn’t have the money, so they will need to borrow the money by issuing government bonds. The more they borrow, the riskier they become, and so interest rates need to go up to cover off the increased risk. Quite simply – the more the government borrows – the higher interest rates should go to compensate for the risk. Now, I am not saying that the Federal Government is in the B lending space or anything, nor are they putting a second mortgage on Newfoundland, but they are running some pretty large deficits, and the bond market is noticing.

To add a little more onto the pile of problems, gold has had a record run at it’s all time highs here ( non inflation adjusted ), and is starting to worry some traders that a problem could be coming. When people think a problem lies on the horizon they buy gold, and they buy US Dollars. That is it, and that is all. They don’t buy Canadian government bonds – especially when the government is spending like drunken sailors on shore leave. Last year I did a blog post about my concerns with rising gold prices, and that it leads to a liquidity event within 12 to 18 months or so. This initial time of 12 to 18 months from that post would put us somewhere between September 2024, and February 2025. Golds’ run has continued unabated for a while now, so something is brewing. For those of you on TikTok doing your videos about rates coming down, gold may be your saviour. If we do get a liquidity problem, the BOC, and a lot of other central bankers will be forced to drop rates quickly to avoid outright deflation. This is my only scenario where rates come down quickly, or by a lot, and would be referred to as a ‘ black swan event ‘. Unfortunately, rates coming down won’t be of much use to our industry if liquidity freezes. If liquidity freezes a bank wouldn’t lend money to anyone anyways – regardless of where interest rates are at.

Call your clients, get your rate holds in, and broker wisely.