Rate Wars and High Temps

While everyone has been busy enjoying some pretty amazing fall weather, the temperature isn’t the only thing heating up. It appears that maybe, perhaps, quite possibly the bond market is taking its que from Mother Nature, and heating up itself.

This may not be the time to interrupt the Tik Tokking realtors, but it appears that their dancing may be short lived. While I would hate to go against the chorus of realtors that claim that you need to buy now in order to afford a home, I must stick to my guns and once again introduce some actual facts to the story. The last couple of weeks have started to dump a little cold water on the ‘real estate can only go up from here’ theory. Lets explore.

For those of you who track bond yields, you might have noticed that the line seems to be going the other way. All of a sudden when everyone KNEW that rates JUST HAD to go lower, we have the 5 year Canada Government yield up 33 bps in 2 weeks. EVERYONE JUST KNEW rates were only going lower. Sorry to break the bubble here, but rates can go both ways – especially when you least expect it. When everyone just seems to know something – take the other side of the trade. Are the bond vigilantes finally starting to take control? Maybe. Is Mr. Market finally demanding proper return for the risk they are taking? Maybe.

Of course, it took lenders about 3 micro seconds to raise rates, and we are already seeing the specials on 5 year paper disappear, and rate hikes will be coming this weekend, and into next week. Gotta keep those juicy profit margins and spreads somehow. Always amazes me how the rates take weeks to come down, and about 3 seconds to get bumped.

So why did this happen? Well, the US economy, which had been all but written off 2 weeks ago after Jerome and Co. rode in on their 50 bp cutting horse to save the day appears to have had a fire lit under its ass. The US employment numbers were released today, and beyond strong is an understatement. Job creation is firing on all cylinders now, and whatever data appeared to justify a 50 bp cut only a few weeks ago, could almost be seen as the reason to raise 25 bps today. Now, that does not mean I am calling for the Fed to raise rates, but certainly if we see another jobs report like we saw today next month, the Fed cuts are off the table for the rest of the year. Based off of the employment report we saw bond yields shoot up this morning like a rocket, and the CAD took it on the chin with the prospect of less Fed rate cuts this year. For those of you with one eye looking to the next BOC meeting, it looks like odds of Uncle Tiff cutting 50 bps got a lot less likely today. There is still a chance of a 50 bp cut, but it is looking more and more like 25 bps. Of course there is still a lot of wood to chop before we get to the October 23 BOC meeting – namely the Canadian employment report next week.

While monetary and fiscal policy are dueling it out , there is also this uncomfortable truth right now that is the housing market itself. It seems that every month when we get the data dumps from the local realtor boards, the data is not exactly fantastic, and in some cases it is downright shit. Remember when there was no supply? Well, we done and fixed that little problem now didn’t we? Now, the supply seems to be the issue, but only because there is so much of it. Months of inventory are starting to grow at a very fast pace. Months of inventory are growing at a very fast pace at a time when rates are rising, and unemployment in Canada is growing. Not exactly the recipe for a success sandwich, but rather the ingredients for a shit sandwich if you have a real estate license. Too much supply, with expensive money and fewer people having jobs is not going to be the answer.

Now of course, none of these little inconvenient truths have stopped or even slowed down the realtors from spamming my email every day with their CRM emails, dances, and videos on why NOW IS THE TIME TO BUY. I probably get 2 to 3 emails a day from realtors ( 90% auto generated and sent by a CRM system ) and never once did they say it WASN’T time to buy a house. Apparently anytime they can generate a commission is the right time to buy a home. Who Knew?

Be careful on suggesting the variable, and please do not get caught up in the ‘rates have to go lower’ theme. Yes, rates should come down as the economy gets worse, but there is never a guarantee. In case you haven’t watched the news in the last week, half of the South East US was wiped off the map by hurricane Helene, and that will generate a lot of re building. All of this re building will increase demand for a lot of materials, and hence prices go up. Prices for lumber, plywood, shingles, concrete, etc. etc. are not country specific. If plywood is in high demand and shoots up in the US, it will shoot up in Canada as well. There will be hundreds of billions of dollars in re building done, and that will help boost US GDP in the coming quarters. All of the temp labor hired on to help with cleanup and re build will help boost US jobs numbers in the coming months. Increased prices for raw materials could boost inflation numbers in the USA.

For those of you who think ” Ah, that is an American problem ” – think again. We saw how a good employment report out of Washington today boosted the Canadian 5 year bond by 14 bps this morning – even though the Canadian economy is circling the drain. Inflation in the US specifically, and perhaps even into Canada may not have gone away, it may have just been resting. When we see hundreds of billions of dollars of re building happen, it is bound to throw some supply / demand dynamics out of whack, and that generally causes inflation.

Watch the data, assume nothing, and keep your ear to the ground for what happens; both at home and abroad. If we start to get bond markets that start pricing in higher fixed rates, then we will see a re adjustment of the yield curve, interest rates, and currencies. It is never pretty when you need to rebalance billions of dollars of exposure at the capital markets level. For now the yield increases of the last few weeks may just be a flash in the pan. For the dancers of Tik Tok, let’s hope it was just a flash, because if higher bond yields are the new theme, the only dance they will be doing is the poverty dance.

It does have me a little bit worried that Jerome and Co. at the Fed cut 50 bps as their opening act, and bond yields have continued to rise. Perhaps the Fed is trying to talk bond markets down, and convince the world that we need lower rates? Whatever the reason, you have central bankers all over the world doing everything in their power to cut interest rates, talk down interest rates, suggest lower interest rates are coming, and yet the bond market just says ” hold my beer”. We are at the point in the staring competition where someone has to blink. Will it be the bond market, or will it be the central bankers? Just like in sales 101 where they teach you ” the first person to talk loses “, this is a case of whoever blinks first – loses.

A cool down is likely coming in the weather department, but it appears the bond market has found its’ stride and the 14 day forecast is calling for higher yields, with a chance for some economic showers that could lead to a cold front coming to realtors commission checks.