Tariff Tuesday

Happy Tariff Tuesday everyone! It is like taco Tuesday, except that instead of warm delicious tacos we have stupid crazy politicians.

It is now official, and tariffs, and counter tariffs are in place. For the average person I really don’t think it will do a whole lot. The one thing that news, media, and even economists always get wrong is the power of substitution. Yes, some products will go up in price, but generally when this happens consumers will substitute the more expensive items for a lower priced item, and completely negate the effect.

As most people in our business know, the economy has been failing slowly for a while now, and perhaps these tariffs and counter tariffs will be the straw that breaks the camels back and sends us into a recession. Tariffs or not, the recession was coming, so maybe tariffs sped it up a little bit??

But, y’all have had enough tariff talk from the news, the politicians, the TikTok, and the like, let’s talk about something a little different, shall we? There is no better way I can think of to kill the tariff pain than by talking about an even more boring subject – interest rates and bonds yields!!

With the speed of information moving around the last few weeks bond yields are up and down and all around. In 6 weeks the Canadian 5’s have gone from 3.28%, down to todays rate of 2.63%. That is over 65 bps of reduction in 6 weeks, or about 10 bps a week!!. At this rate, rates would be negative by Labour day!!! Now, I find a couple of things interesting about yields and how they have reacted, and I will give you my thoughts below. Of course, like every other post, these are my thoughts and ideas, and I am not saying you should follow suit. I simply try to provide an alternative viewpoint. But, I am now used to everyone arguing with me, so feel free if you want to argue – let’s face it, everyone argues about everything these days anyways.

1. First and foremost, I think a lot of the bottom may be in for bond yields. Today’s action in the bond market was a move that I have not seen in quite some time. Today was probably the worst day economically for Canada since 2008, or the early days of COVID. All bad news, all piling on, and no sunshine to be found anywhere. However, even though the Canada 5 opened up deeply red, it started to move higher intra day, and ended the day up 10 BPS!!! To see this kind of price action in any market is usually an indicator that we have bottomed out. To see this action today of all days, tells me that the trend for Canada 5’s could be reversing. Give me a few bps either way here, but I think the Canada 5 year yield is right about the low point for the year. It bounced nicely off of the support line this morning, rallied into the afternoon, and finished at the highs of the day. Any little piece of good news – no matter how small, will give the trading bots reason to sell bonds and drive rates yields higher. If tariff’s get reduced or removed, if GDP comes in higher, if inflation zigs when it was supposed to zag – any news could send yields up.
2. Warren Buffett famously said ” Be greedy when others are fearful, and be fearful when others are greedy”. Never in my life have I witnessed an industry that lives that motto more than Canadian banks. Even though yields are falling through the floor, rates on fixed rate mortgage terms have been slow to react. Expect this to continue. Canadian banks will now dust off the old playbook they always used in every other time of stress, and claim that since there is a lot of uncertainty in the market, they need to pad margins to adjust for risk. Do not expect banks to give you point for point reductions on fixed terms., If we are lucky we will see 1 bp of fixed rate reduction for every 2 or 3 in the bond market – and it will take quite a while to react. As Ron Butler always says ” Rates take the elevator up, and the escalator down”. This time around though, we may find the escalator out of order, and rates may just hold right about where they are to make up for banks perceived risks. Banks have a lot of risk weapon terminology they can pull out here – geopolitical risk, default risk, credit market risk, the list is endless, and I fully expect to see them use any and all terms to pad margins in the coming days, weeks and months. They will talk about ensuring their balance sheet is strong to survive the coming issues, they will talk a lot about loan loss reserves needing to be increased, the will talk about falling asset values – basically anything they can to distract you from the fact that the gross margin for them is increased.
3. Tiff and Co. is about to get benched. No matter how you look at it, inflation is on the rise in Canada, the US, most of Asia, and a lot of European countries. This was well documented and happening before Tariff Tuesday. Now we add the stupidity of politicians to the mix, and we get tariffs, with counter tariffs, and inflation will be a sure bet. Here is where it is going to get tricky for Uncle Tiff. When the BOC meets and they review all of the data, they will see unemployment rising, house prices declining, disposable income going down, and a shit load of other factors that are all moving in the wrong direction, but as long as inflation is ticking up, they cannot cut rates. They can’t do it. Inflation is the mandate of the BOC, so no matter what, they cannot cut to stimulate the economy if inflation is moving against them. And move against them it will. JT today announced that he would basically write stimulus checks to everyone to help deal with tariffs. Okay, but the last time we sent out stimulus checks we had fucking 9% inflation that followed. How dumb are these politicians? And by that question, I am not simply picking on JT here. No no, I think all politicians are completely useless, and good for nothing. If any one of those miserable pricks had to live a life in their constituents shoes shit would change fast. The BOC came riding to the rescue on every single economic problem the country has faced for the better past of 3 decades. This time though, they are going to be sidelined.

The good news out of all of this, is that out of the tough times is where we start to rebuild for the good times. I have always thought 2025 would be a year to pivot, turn the corner and re build. I always said it gets worse before it gets better. This is the getting worse part of the equation. Things get bad, and then get worse, and then, and only then, are changes made that allow things to get better.

Stay nimble, always lock in a rate for a client, and never get lulled into complacency. A lot of mortgage brokers thought that an economic shit storm would be good for our business. A lot of people say how good news is bad news for bond, and bad news is good news for bonds. Well, I hate to be the bearer of the news, and please don’t shoot the messenger, but you may want to drop that saying from the lexicon. It may very be that bad news is just bad news. I think we are entering a part of the cycle where bad news may not be the good news you thought it out to be. Brokers that have been around a while will know what I am talking about. Back before central banks went full socialism, bad news used to be bad news because it was actually bad. Bond yields only went down because the economy was in the shitter, and no one could afford a home, or didn’t have a job – so it didn’t matter what the interest rate on a mortgage was. We need to go back to those days.

While a lot of newbie brokers got into the industry during COVID, rest assured that what unfolded during COVID was not normal for our business. Don’t make your business plan for the rest of your career on a once in a generation blip in the finance model. Pretty soon bad news will be just that – bad, and good news will be just that – good. And god am I ever looking forward to going back to that kind of environment.