Chad Moore Calgary Mortgage Broker

Hey Folks!

Let’s talk about the following:

• Fixed rates move higher, buy why?
• Tapering of asset purchases and what this might mean. 
• Interest rate hikes by central bankers – rock and a hard place. 

As a home owner, or potential home owner, I think this information is fundamental to understand and have some context on.  I’m doing my best to simplify what’s happening and keep you engaged.

Fixed rates are moving higher!  

But why?  

First, let’s understand the mechanics of the bond market and then discuss “why“.

Mechanically, bond prices and bond yields are the inverse of each other. 

Let’s un-package the past 18 months of bond market activity.

A form of economic stimulus, in response the the pandemic, was to provide liquidity to the market through bond purchases. 

Bond market stimulus explained:

When central banks step into the market purchasing bonds they are absorbing/creating additional demand in that market. As a result of this artificial demand, with supply remaining equal, bond prices rise. 

As bond prices rise, bond yields fall (remember, bond prices and bond yields are the inverse). When bond yields fall, fixed Mortgage rates fall. 

When borrowing costs are low, people borrow, asset prices rise, people feel wealthy, consumers spend. Have you seen this in your life? This is the desired result of the economic stimulus of the bond purchase program. 

Bond market stimulus being withdrawn (tapering):

Today, central banks are very close to slowing (tapering) their bond purchases. When central banks purchase less bonds, without an equal offsetting of bond purchasing in the market, there is less demand for bonds. In this scenario, bond prices fall and bond yields rise. When bond yields rise, fixed Mortgage rates increase.  This is where we are today.  

Bond market and children at the playground:

The bond market is seemingly “pricing in” the planned tapering because the U.S federal reserve has provided ample forward guidance. 

Remember several months ago when chairman of the federal reserve was stating “we’re not thinking about, thinking about tapering“. Then the narrative changed to “we’re thinking about tapering“. Now the messaging is “we’re planning to taper“. I’m reminded of my brother planning to take his son home from the park ;-). 

Ok, we understand the mechanics of the market – got it. Another factor influencing bond price reduction is seemingly persistent inflation. 

Inflation and the bond market.

Both the Canadian and U.S central banks have been trying to control the inflation narrative by stating inflation is transitory or inflation is high due to base case comparison. 

Base case comparison means comparing year over year inflation to numbers from the depths of the pandemic. In my opinion, Tiff Macklem, governor of the bank of Canada, has gone out of his way in the media to tell Canadians “inflation is under control”.  Is it?

Inflation expectations are important to manage …

Why are central bankers trying so hard to control the inflation narrative? Because inflation expectations, in and of themselves, are a major driver to inflation. Kind of like a self fulfilling prophecy. 

If I expect inflation to be higher, I might change my purchase decisions, expect higher wages, raise prices and or willingly pay more for goods etc. 

Another factor pushing bond prices lower, driving bond yields and Mortgage rates higher, might be the bond market is pricing in more persistent transitory inflation (if that makes any sense, haha). 

Supply chain bottlenecks, labour shortages, energy crises, continuous waves of COVID infection, vaccine hesitancy, COVID variants – and more – are seemingly not as transitory as many first hoped. If inflationary numbers are persistently this high, owing bonds yielding significantly less than inflation is undesirable for bond holders – so they sell. 

Canada’s Key Central Rate.

So what is likely to happen with Canada’s key central interest rate? Well, the official forward guidance is this …taper bond purchases, reinvest in bond renewals, then consider a rate hike. 

Several Canadian institutions are predicting 0.25% or 0.50% rate hike by the end of 2022. Today, the Bank of Canada’s key lending rate is 0.25%. The commercial bank prime rate is 2.45%. 

I’ve written to you about the uncomfortable economic scenario of stagflation.  Stagflation is a high inflationary economy, combined with stagnant or decreasing gross domestic product (GDP – national net income). 

The Bank of Canada is releasing their Monetary Policy Report and making a interest rate announcement next week.  I’m reporting and updating you with any change to the forward interest rate guidance from that meeting.

What is the opportunity in all of this?

I have a plan. Here it is …

1. As fixed rates increase that will decrease Mortgage penalties for fixed rate Mortgage clients.
   
   
2. I think variable interest rates are incredibly favorable in today’s lending environment – even with potential rate hikes on the horizon.
   
   
3. With Mortgage penalties lowered, and variable rates at all time lows, making a strategic switch is a worthy pursuit. 

If I call you with this opportunity, please be open to hear about your savings! 

Conclusion.

I hope my (simple?) explanation of bond market mechanics, tapering and inflation help you make sense of what’s happening.

In this flux, there is opportunity for you!  I’m watching carefully how I can help you save money, with the banks making less. 

If you find this email helpful, please share it with folks who you think might also find it valuable.  Thanks in advance!

Talk soon,

Chad Moore

P.S.

Ok, my coffee prayers have been answered!  My office just purchased a Breville espresso machine …It’s day 1 and I’m giving this machine the work out of it’s life, LOL.