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We live in strange times. Today, five-year Government of Canada (GoC) bond yields are lower, at 0.72%, than the Bank of Canada’s overnight rate, at 0.75%. In other words, you now earn less yield if you lend your money to our government for five years than banks earn by lending money to each other overnight.
This odd phenomenon matters to Canadian fixed-rate mortgage borrowers because their rates are priced on GoC bond yields. If the supply/demand balance that is helping to keep these yields at ultra-low levels stays relatively constant, today’s ultra-low mortgage rates are likely to remain in place for some time. But that raises an important question, which is being posed with increasing frequency around the world: Who is buying government bonds at these levels and why? The answer is important because understanding where today’s demand is coming from will help us evaluate the likelihood that it will continue.
Let’s start by looking at the yields you can earn on a selection of 10-year government bonds as of last Friday, with inflation rates netted out:
At these yields, a lot of Freedom 55 retirement plans have been converted to Freedom 88 plans, but only because there is still plenty of demand for government bonds at these yield levels. These ultra-low yields might seem crazy at first glance. But inflation and growth rates are also very low and the bond market has a good track record of predicting where economic momentum is headed, so let’s not be too hasty in assuming that today’s bond buyers have completely lost their minds.