Possibly the most eye-glazing two-word phrase in personal finance is ‘bond market.’
People are fascinated by the stock market, which is definitely more dramatic. But the bond market has more of an influence on your daily life, especially if you’re renewing a mortgage or plan to buy a home. If you want clues as to where mortgage rates are going, check what’s happening with bonds.
What bonds are telling us right now is that financial markets are as confused about inflation and the path ahead for interest rates as everyone else. The interest rate on bonds – the yield – has been up and down a lot in the past year. Falling yields clear the path for lower mortgages rates, while rising yields put upward pressure on mortgages.
The reason for this uncertainty about rates is that inflation, particularly in the United States, has yet to back down to the level preferred by central bankers. The stickiness of inflation raises the question of whether the cost of living in the mid-2020s is going to rise more than in the pre-pandemic period. Inflation then was locked in around 2 per cent. Looking ahead, a 2 to 3 per cent range seems quite possible.
If that’s the case, then we shouldn’t expect to see mortgage rates get back to the low levels of the “normal” economy of 2019. Five-year fixed rate mortgages could be had for 2.5 to 3 per cent back then, compared to 4.5 to 5 per cent today. We will see further declines in mortgage rates if the inflation rate falls and doesn’t pop back up again. But without a complete collapse of inflation, don’t expect to see 3 per cent five-year mortgage rates any time soon.
Borrowing costs with variable-rate mortgages ride up and down with the Bank of Canada’s overnight rate, which is expected to start edging lower as soon as this summer. Back in mid-2021, you could get a variable-rate mortgage in the area of 1.5 per cent; today, 6.25 per cent is a good deal. If the Bank of Canada is aggressive with rate cuts this year, maybe we get that 6.25 per cent down to 5.25.
The data on home sales so far this year suggests the housing market is tentatively emerging from the slump of the past 24 months. The unlikelihood of a quick, decisive drop in mortgage rates raises questions about how strong and sustainable a housing rally would be.
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Rob’s personal finance reading list
The cost of parenting, 2024 edition
American parents are spending almost US$17,000 to financially help their adult children, according to a new survey. Here’s my latest on the cost to parents of helping adult kids, with a focus on helping with mortgages.
Any travel, any time
A look at the best travel reward credit cards for booking flights, hotels, car rentals and vacations packages without restrictions on travel provider or timing.
A money coach on curbing over-spending
I generally shy away from tips for spending less because there’s so little new to say. But this list strikes me as worthwhile because it acknowledges the emotional side of spending.
Retirement homes have lots of room
The dynamics working against affordable rent include strong demand for rental apartments and a lack of supply. Retirement homes are a different story – supply exceeds demand, which means there are deals to be had. Also, some retirement homes are opening up to students.
Ask Rob
Q: I’m a 47-year-old DIY investor. Forty per cent of my equity holdings are in an S&P 500 ETF. The Magnificent Seven now comprise about 30 per cent of the ETF’s portfolio. To diversify and limit risk, do you recommend using a S&P 500 equal weight ETF instead?
A: The Magnificent Seven are Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla and, yes, they account for about 30 per cent of the S&P 500. Part of index investing is taking the index as it comes, even in times when diversification suffers because some stocks dominate. I’m open to the idea of adding money to an equal weight S&P 500 ETF to diversify U.S. holdings, but I’m not sure that selling your existing S&P fund makes sense. Equal weight for the S&P means each stock has a share of no more than roughly 0.2 per cent of the portfolio.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
A five-point introduction to ESG investing, which focuses on stocks and bonds issued by companies that score well in environmental, social and governance factors.
The money-free zone
The Australian singer Nick Cave is a words guy – the music’s often there for decoration. But in his new song Wild God, there’s a monster soaring chorus that that blew me away. My new favourite song of the year.
ICYMI
- Should your teenager have a part-time job? It’s about more than money
- More than half of Canadians lie about their salary – here’s why
- Three reasons I’ve never recommended a GIC – and I’m not starting now
- How single Canadians can make the most of filing their taxes
More Rob Carrick and money coverage
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Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Why millennials and Gen Z are Alberta-bound for a more affordable life • Rising interest rates brought pain for new homeowners - and opportunity for house hunters • Why more Canadians are choosing to be childfree or delay parenthood • Love in the time of inflation: How to manage rising costs when dating • You're not bad at money - you're suffering from money shame • Retirement might look different for Gen Z and millennials. Here's how to plan for it • Recession-beating tips for the job market, housing, investing and the cost of life • Is the middle class dead for millennials and Gen Z?
- ✔️ The housing file: A house isn't special. Get your head straight about the reality of home ownership • The good, the sad and the unaffordable: Saving for a home downpayment in Canada's big cities • Property taxes are popping in some cities - how worried should you be about other tax hikes? • Our other real-estate problem - people have too much wealth tied up in houses • Borrowers and savers, here's how to time the eventual rollback of interest rates
- 📈 Investing: Canada's top digital broker is TD Direct Investing, with an assist from the TD Easy Trade app • 2023 Globe and Mail ETF buyer's guide part one: Canadian equity ETFs • For the ultimate in cheap investing, check out the Freedom .08 ETF Portfolio • Yes, there is risk in Canadian bank deposits for the unwary and complacent • CDIC covers bank deposits, but who protects your investments if your broker goes bust? • Answers to your questions about the low-risk ETF paying almost 5% • Happy fifth birthday to one of the all-time best investing products for everyday people • An investing strategy that wins cleanly over the long term by outperforming in bad years like 2022
- 💰 Your money: Mortgage holders, savers and GIC investors, it’s time to change your thinking on interest rates • How much debt is each generation of Canadians carrying, and how do you compare? • For the sake of their financial futures, young people should leave Toronto and Vancouver • This practical new spin on a savings account might just peel you away from your big bank • Rental fraud grows amid rise in fake, falsified tenant applications • Are Canadians worse off financially now than in the 1980s? • From groceries to auto loans, here’s how much more it costs to live right now • When saving for retirement, should you change your asset mix over the course of your career? • Do retirement income needs always rise alongside inflation? Not necessarily • When the bank suggests you lock in your variable rate mortgage, it has an angle
Rob Carrick