Dave Larock in Interest Rate Update, Mortgages and Finances
Last Friday U.S. bond yields surged higher as investors reacted to the release of a stronger-than-expected U.S. employment report (for January).
Bond-market bears have been looking for signs that U.S. inflationary pressures are building and the latest employment data fuelled speculation that U.S. labour costs may finally be breaking out.
The five-year Government of Canada (GoC) bond yield rose in sympathy with its U.S. counterpart and if that upward momentum carries over into this week, we will see another round of increases to our five-year fixed mortgage rates.
Here are the highlights from the latest U.S. employment data that got the market’s attention:
The lack of meaningful growth in the average U.S. wage (until recently) has confounded market watchers because the U.S. economy seems to have had drum-tight labour-market conditions for some time now. It has been puzzling that wages have barely outpaced overall inflation under those conditions.
There are many market watchers who believe that the recent rise in average wages is a sign that labour costs may now finally be headed materially higher. Many are now speculating that the Fed will be forced to hike rates more quickly than expected. The Fed is forecasting that it will raise its policy rate three times in 2018 but the consensus forecast is now leaning towards four hikes in the coming year.
With that said, the contrarian in me can’t resist pointing out there were some important details in the latest U.S. employment report that suggest bond-market investors may have over-reacted:
Bond-market investors have been making do with ultra-low yields for the past decade and that makes them hyper-sensitive to any signs that rising inflationary pressures will eat away at their meagre returns.
Against that backdrop, it is understandable that they will tend to shoot first and ask questions later when new data are released - but it will be interesting to see if this week the ‘asking questions’ part of that approach causes a reversal in last Friday’s bond-yield run up.
As is often the case, the simple conclusions drawn from the headline, and from the market’s initial knee-jerk reaction, don’t fully hold up under more rigorous analysis.
The Bottom Line: Last week’s U.S. employment report has fuelled a rise in bond yields that may cause our fixed mortgage rates to rise over the very near term, but that doesn’t change my overall view that longer-term forces will still conspire to keep them lower for longer than the consensus expects.
David Larock is an independent mortgage broker and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear on Mondays on this blog, Move Smartly, and on his own blog, Integrated Mortgage Planners Email Dave