The “Not So Much” Interest Rate Tsunami?

by JDH on October 29, 2022

Last week we discussed the Interest Rate Tsunami.   I made the point that the 5-year bond yield determines 5-year mortgage rates, and the bond yield was going up.  Way up.

Then, this week, the Bank of Canada surprised everyone and “only” raised interest rates by 50 basis points, not the 75 everyone expected.  As a result, the 5 year bond yield “crashed.”  Here’s the 5-day chart:

At the start of the week, the yield was 3.75%.  At noon on Thursday, it was down to 3.3%.  That’s a drop of over 11.5% in less than four days.  Talk about volatility.

By the close of business on Friday, the yield was back up to just under 3.4%, so 5-year mortgage borrowers get a small reprieve.

For how long?a

I don’t know.

Inflation remains high, and unemployment remains low, but they are lagging indicators.  They show us what was happening six months ago.

It takes time and effort to hire an employee, so employers don’t want to lay anyone off if they think they may need them soon.  It’s only when it becomes obvious that the recovery isn’t happening as quickly as expected that the layoffs begin.  We aren’t there yet.

My gut feeling is that we have at least one more interest rate increase in Canada, and probably two in the USA this year.  If interest rates continue to increase, that’s not good for the stock market, so I would not be going “all in” now.

But that’s just me.

Let’s see how it plays out.