How is the bond market reacting to the impending rate hike? Find out here.

  • Andrew Masliwec, Analyst, Capital Markets

Greetings mortgagees and mortgagors,

You know, sometimes you got it and sometimes you don’t. I’m not really sure what I got this morning so let’s dive in and see what happens.

Inflation on this Friday

The earth shook this morning on Friday’s CPI numbers. I mean, it could be the earth shaking or the constant and ongoing construction in our building. Who’s to know? There’s nothing better than 830 am jack hammering below your feet. It really gives you the distracting noise you didn’t know you needed early in the morning.  But that’s enough about my first world problems, let’s talk about the potential problem for Poloz and Co.

The CPI number, which is the metric used to measure inflation in an economy, came in much lower than expected this morning. The surveyed economic forecasters ran their algorithms and were expecting a result of a slight gain of 0.1% month-over-month (MoM) for September. The actual number came in much lower at -0.4% MoM.  This takes the year-over-year inflation number from 2.7% to 2.2%.  Airfare showed the largest decline, which had a 16.6% decline in September, basically unwinding that large gain in July that I most likely talked about in August’s commentary.  Obviously, the key take away is take vacation in September, not July.  Autos and travel services also showed hefty declines in September MoM, coming it a -1.25% and -4.9% respectively.  So is this a problem, having inflation going down while rates are slated to go up? Not really. The ‘core’ measure of CPI, which uses a factor model to filter out price fluctuations of specific components, is averaging exactly 2% in September which is in line with the Bank of Canada’s projections.

So basically, inflation was lower in September but the decreases were only in 3 categories and not widespread across the basket. Which means, the Bank of Canada is still 99.99% hiking interest rates next Wednesday.  It’s worth noting that with these inflation numbers, further hikes have taken a bit of a hit, signaling a potentially slower pace to further interest rate moves.


So with the Bank of Canada for sure hiking rates next week, how is the bond market reacting? Obviously this has been a long time coming so bonds have been selling off throughout the month.  The 5 year is currently yielding 2.39% and the 10 year is yielding 2.48%. A month ago, the on-the-run 5 and 10s were yielding 2.31% and 2.42%. As recent as a 3 months ago, the 5 year was 2.08% and the 10 year was 2.18%.

So no fake news here, bond prices are lower and yields are higher. Interestingly, the 5-10 spread used to measure steepness of the yield curve has been relatively stable at 9-10bps over those 3 months.  What will happen next week after the hike you ask? Well you’ll just have to read the next “capital markets update’.  The only predictions I make are Maple Leafs parade routes.  Down Yonge to Front, Front to Bay, Bay to City Hall.

Finally, this week brought some groundbreaking changes to our marijuana laws. It’s legal. Per Statscan, 4.9 Million of the strong and free, aged 15-64, spent $5.7 Billion on cannabis last year. That’s the equivalent of about $1200 per person. Economists are expecting that to increase which will give GDP a boost.  Good (or bad?) news for all the inflation hawks out there though, “peak weed” prices were already reached in 1989. 1989, a time when I wasn’t born and Paula Abdul/ Milli Vanilli had multiple singles on the Billboard 100. Looks like I wasn’t missing much.

Stay groovy man,