This week’s chart has me a bit baffled. Usually we focus on simple trends like demographics, retail sales or rents. This week we’re looking at the debt market, which reflects all sorts of expectations about the future of the economy and markets.
If you aren’t familiar with Canada Mortgage Bonds, they are a CMHC-backed borrowing vehicle for investings in residential. Like many government offerings, they are ”risk-free” and generally have a low yield compared to corporate bonds or riskier debt. Generally the CMB yields just a little bit more than the overnight rate.
However, we’re in an odd situation: the ”spread” is negative with the overnight rate, the mortgage bond pays less than 4.5%. How do we interpret this situation? I’d say it boils down to future expectations. The market sees a situation where future interest rates will be below 3.3%, so this debt will have more value. It shows a strong demand for safe assets, which can be a recession indicator (people see downside elsewhere). Investors expect rates to be cut fairly soon, to make a 3.3% yield attractive.
For months there has been discussion of a rate cut, as soon as inflation is back to normal, and the debt market seems to support that. Recent economic data has confounded the view, as inflation is rising again, and the Bank’s decision to pause rate hikes looks premature. There’s even discussion of a (gulp) rate hike next month – Scotiabank’s economist advocated for a ”now or never” rate hike to control inflation.
I know we’re all tired of this topic, but it’s looming over all that we do here – not just property sales but business decisions re: leasing, hiring, investment and expansion.