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Debt Market Suggest The Rate Cut, Banks Disagree?

Debt Market Suggest the Rate Cut Hero
Hiking or Cutting?

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.
Debt Market Suggest the Rate Cut

The bond market suggests a rate cut is imminent, but recent economic data seems to point the opposite direction. 


Pour plus d’informations, veuillez contacter:

Adam Jacobs

Head of Research | Canada

Toronto Downtown

Colliers Canada's head of research, leading a cross-country team of 20 mapping, analytics and research professionals. Formerly head of Canada research at Cushman Wakefield and Director of Analytics at Oxford Properties. Featured in mainstream publications such as the Toronto Star, industry publications and podcasts. Specializing in the big picture and the fundamentals driving real estate - demographics, the macro environment and the global economy. 

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