Bond Yields Dropping: Fixed Rates Still High

Over the last few weeks, we learned that inflation numbers in the US dropped a bit. The market had its rally and bond prices dipped, but are we out of the woods yet? Banks’ fixed rates are still high and we have inverted yield curves. Have a listen to this episode to learn what this means for the short and long-term future of the economy.

3 key takeaways from this episode are:

1.     Through good times or bad, banks keep their shareholders in mind.

This is their obligation, so don’t take it personally. Even though bond yields have declined, banks still have high fixed rates. They can justify it by saying the added amount is to ensure protection against market instability, but it’s still extra profit when those earnings reports come out. People who work at banks also don’t have to have mortgage training. That’s another cost the banks will save because they can. What should consumers do with this information? Don’t do all your business with one bank and use a mortgage broker to get you the best rate. By going to other institutions, you are showing your bank that you are knowledgeable about the other options out there. They want to optimize earnings, but they don’t want to lose you. And by going to a mortgage broker, you are getting a trained professional IN THAT FIELD who will work to get you the best product for you.

2.     The best way to make money in the market is to deploy capital when prices are low and others are fearful.

Investors make money when they buy at good prices. There is no way of knowing when assets are at good buying points, but the economy tends to swing on a pendulum that favours the positive side. If you have a long-term time horizon, you should consider buying assets anytime the economy swings down because in the long run, you’ll make money when the pendulum swings again. This may not apply to all assets and all economic situations, but it is worth considering if you ever had your eye on an asset and you see it discounted due to tough conditions.

3.     The markets may have rallied, but there might be a lower bottom in this cycle.

The news of inflation leveling off in the US is good, but there are way more variables at play for the long-term health of our economy. We currently have inverted yield curves, which means the return on a bond declines as the term gets longer. The implication of this is that once a bond of shorter duration matures, investors are pricing in the idea that proceeds will be reinvested in a time of reduced rates and tougher circumstances, hereby leading to a bond of longer duration from the beginning having a reduced rate today. The last time we saw inverted yield curves was 2008 and they have historically told us that a recession is incoming. Even if inflation does level off, the overnight rate stabilizes or drops, and asset prices start to climb, there is still the fear that if the Bank of Canada drops the rate too quickly that inflation could head back up again. This is something they’d really want to avoid.

Marcus Tzaferis and the Cannect Team

 

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0:00 - Intro
1:10 - It’s a bad time to take fixed rate mortgages with bond yields dropping.
6:30 – It is not wise to do all your business with one bank, according to the Bank of Canada.
9:29 – Monoline lenders are very helpful for our economy but were hurt when the BoC instituted a rule change impacting their ability to get portfolio insurance.
13:18 – You don’t make money when you sell something, you make it when you buy.
15:56 – How to make money in the market: Deploy capital with asset values discounted. Monitor market fear and greed.
 24:37 – The markets rallied with the expectation of inflation decreasing, but we may not have settled into a bottom just yet.
26:13 – We currently have inverted yield curves, which tends to indicate a recession is near.
30:51 – A lot of Canada’s wealth is in Real Estate, so drops in values hit the economy hard.
34:57 – Where is the economy likely headed over the next year?
40:20 – Are other mortgage brokers struggling in this environment?
45:35 – Another reason to use a broker? People who work at banks are exempt from having mortgage training.
50:24 – Wrapping up the episode.