It is one of the most commonly tracked economic indicators and is highly indicative of the performance of the Canadian economy. The yield can go up or down depending on market conditions, but generally speaking, when bond yields go up, it means that investors are anticipating higher returns from the bonds they own. When bond yields go down, it means that the bonds are not offering as much return as previously expected.
The current environment has seen a significant rise in bond yields over the last few months. This is mainly due to two factors. The first factor is the Bank of Canada (BOC) announcing an emergency 25 basis point cut to its overnight lending rate. This was done to help stimulate the economy by providing more money into the financial system. The second factor is the uncertainty surrounding the coronavirus pandemic. These two factors have caused investors to become more risk averse and move their money into safer assets such as government bonds, resulting in the increase in yields.
While this rise in yields can be beneficial for some investors, it can be quite detrimental for those who are dependent on fixed income investments. This is because when bond yields rise, the value of existing bonds falls, resulting in losses for investors. As such, it is important for investors to understand the potential implications of a rising bond yield before investing in bonds.
Moreover, the rise in yields also impacts the mortgage market. Mortgage rates are typically tied to bond yields, which means that when yield goes up, so does the mortgage rate. This can add additional stress on Canadian households already struggling with debt, as mortgage payments can become more expensive.
In conclusion, Canadian bond yields are an important indicator of economic growth and stability. While a rise in yields can be beneficial for some investors, it can be detrimental for those who rely on fixed income investments, such as retirees. Furthermore, a rise in yields can also impact the mortgage market by increasing mortgage rates. As such, it is important for investors to consider these factors before investing in bonds in order to minimize potential losses.
This article was contributed on Nov 20, 2023