Although everyone has been enjoying incredible fall weather, it’s not just the temperature that’s rising.
It appears the bond market is taking a cue from Mother Nature and heating up as well.
While I would hate to go against the chorus of real estate agents saying you have to buy now to afford a home, I have to stand my ground and present some facts. The last few weeks have poured cold water on the theory that “real estate can only go up from here.” Let’s explore.
For those who follow bond yields, you may have noticed that the line is moving in the opposite direction. Just when everyone knew who evaluates had to decline, the 5-year Government of Canada yield is up 33 basis points in two weeks. Everyone knew rates were only going to go down. Sorry to burst the bubble, but rates can move in either direction, especially when you least expect it.
Are the nexus vigilantes finally taking control? Maybe. Does Mr. Market finally demand a fair return for the risk he takes? Maybe.
Why this sudden change?
So why did this happen?
The U.S. economy, which was virtually sidelined two weeks ago after Jerome Powell and Co. decided to cut rates by 50 basis points, appears to have had a fire lit.
The US employment figures were released today, and beyond their high reading, that’s an understatement. Job creation is firing on all cylinders, and data that seemed to justify a 50 basis point cut a few weeks ago could now be seen as a reason to raise rates by 25 basis points.
This isn’t to say that I’m predicting the Fed will raise rates, but if we see another jobs report like today’s next month, further Fed cuts likely won’t be considered for the rest of the year.
According to the jobs report, bond yields shot up like a rocket this morning, and the CAD was hit by the reduced likelihood of further Fed rate cuts this year.
For those looking ahead to the next Bank of Canada meeting, the chances of a 50 basis point cut became much slimmer today. Although a 50 basis point reduction is still possible, a 25 basis point reduction seems more likely. Of course, a lot could still change before the October 23 meeting, especially with this week’s Canadian jobs report.
The real estate market faces new challenges
While monetary and fiscal policies clash, there is also the uncomfortable truth about the housing market.
Every month when we receive data from local real estate agencies, the numbers aren’t fantastic and, in some cases, downright bad.
Remember when there were no supplies? Well, we’ve solved that little problem, haven’t we? Now the problem is too much supply. Inventories have been rising at a rapid pace for months, just as rates are rising and unemployment is rising in Canada. This combination is not exactly a recipe for success but rather the makings of a tough market if you hold a real estate license. Too much supply, expensive money and fewer jobs are not the solution.
Why brokers shouldn’t bet on lower rates
Given rising bond yields and potential economic impacts, it is important for brokers to maintain a realistic view of what lies ahead.
Be careful when suggesting an adjustable rate mortgage and don’t get caught up in the “rates need to go down” mantra. Yes, rates are expected to fall as the economy deteriorates, but there are never any guarantees.
For example, Hurricane Helene recently devastated much of the southeastern United States, which will prompt massive rebuilding efforts. This increased demand for materials like lumber, plywood and concrete will drive up prices – and these price hikes won’t be limited to the United States, Canada could experience the same effect. Rebuilding will also boost U.S. GDP and job numbers, potentially fueling inflation in the months to come.
For those of you thinking, “Ah, that’s an American problem,” think again. A strong jobs report released today in Washington pushed the Canadian 5-year bond up 14 basis points this morning, despite the Canadian economy on the brink of collapse. Inflation in the United States, and perhaps Canada, may not have gone away, but could simply remain dormant. With hundreds of billions of dollars pouring into rebuilding efforts, supply and demand dynamics will likely be disrupted, typically leading to inflation.
Observe the data, don’t assume anything, and stay tuned to what’s happening, both domestically and abroad. If bond markets begin to price in higher fixed rates, we will see a readjustment of the yield curve, interest rates and currencies.
It’s never pretty when billions of dollars of exposure need to be rebalanced in the capital markets. For now, the yield increases of recent weeks could be just a flash in the pan.
This is an abridged version of a column originally published for subscribers to MortgageRamblings.com. Those interested can register by clicking here. Opinion articles and opinions expressed are those of the respective contributors and do not represent the views of the publisher and its affiliates.
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Last modification: October 7, 2024