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Over the past several years, bad economic news from the world’s largest economies has meant good news for Canadian mortgage rates.
When several euro-zone countries tottered on the brink of default, investors responded by pouring their money into Government of Canada (GoC) bonds, driving down these yields, on which our fixed-rate mortgages are based.
When the U.S. Federal Reserve announced that it would initiate quantitative easing (QE) programs to stimulate economic growth, investors once again sought out GoC bonds. And why not? They offered higher yields than equivalent U.S. treasuries; our federal government has the cleanest balance sheet in the G7; our federal deficit is manageable (and shrinking); and the printing presses at our central bank remain idle.
Then an eerie calm ensued.
Europe quieted down in time for the German election … but the euro-zone’s leaders didn’t use the lull to fix the structural problems that led to the initial financial crisis. That makes their next crisis all but inevitable.
The U.S. Fed’s stimulus programs have prolonged the U.S. economy’s slow-growth momentum … but every new dollar printed produces a diminishing benefit while fears about the U.S. Fed’s unprecedented balance sheet expansion continue to grow.
Japan’s three-pronged approach to pulling its economy out of its two-decades-long slump finally got its GDP ticking upwards … but this seems to have only temporarily drowned out that other ticking sound that can be heard from Japan. That would be the ticking of its colossally large debt-bomb.
Not surprisingly, as investor fears of sovereign default and stock market crashes began to fade, investors started rotating out of safe-haven bonds. In Canada, this caused GoC bond yields to rise and our mortgage rates quickly followed. On June 3, I wrote this post that explained why our mortgage rates were increasing and I made the case that this run-up would not last. I closed with this prediction:
I think this [bond yield] run up has been primarily caused by the growing belief among investors that the world economy’s tail-risk threats are subsiding but, in my view, the world’s largest economies continue to face significant challenges. For that reason, I think our bond yields will head lower again, and that history is likely to show that this was really just a brief period of calm before the next storm.