First National Financial LP

Market Commentary: Here’s an overview of the good, the bad and the ugly of the markets

  • Neil Silverberg, Senior Analyst, Capital Markets

Greetings – it’s been a while, 

My retirement from writing market commentaries lasted longer than Tom Brady’s retirement from football, so I guess that counts for something. But let’s be honest, we are both just too important to our respective professions and more importantly, our respective marketing departments! Anyway, it’s Oscar weekend and the markets are the wild west right now so let’s get right into it. 

The Good: Central Banks have largely moved on from “transitory” and are finally getting serious about addressing inflation.

It took until inflation hit 5.7% year over year (“YoY”) in Canada and 7.9% YoY in the U.S. for the central bankers to admit that inflation may not be transitory after all. 

To address this issue, both the Bank of Canada and the Federal Reserve increased their respective target rates by 25 basis points earlier in March. The reaction so far? More of the same - bond sell offs and higher yields. It will take a lot more than 25 basis points to appease the market and bring inflation back down to more desirable levels. 

Bottom line: look out for more rate hikes to follow throughout the year and even a potential 50 basis point increase at the next U.S. Fed meeting in May. Both the Canadian and U.S. markets are currently pricing in around 7 more hikes at 25 bps each for the year. Inflation is also expected to continue its upward trajectory for the time being, especially with a significant strain on commodities such as oil and wheat.  

The Bad: Yields are up considerably year to date

In case you haven’t heard, bonds have been selling off for almost three months straight. Before I get to the why, let me provide some context. Here are where yields are at on the 5 and 10-year Government of Canada (“GoC”) bond and Canada Mortgage Bond (“CMB”) as of yesterdays close.

The 5-year CMB closed on Thursday at 2.65% representing an increase of 83 basis points month to date and 109 basis points year to date. Yes, you read that right, 109 bps on the year! The 5-year GoC closed at 2.29%, representing an increase of 81 basis points month to date and 103 basis points year to date. 

The 10-year CMB closed on Thursday at 2.90% representing an increase of 69 basis points month to date and an even 100 basis points year to date. The 10-year GoC closed at 2.40%, representing an increase of 68 basis points month to date and 97 basis points year to date. 

Bottom line: take note of the flattening of the curve here. The 5-year (GoC) increased 81 basis points while the 10-year increased 68. What does the flattening of the yield curve mean? 

The steepness at the front informs investors that the hiking cycle is here, and hikes will happen quickly, but they may not persist for as long as one might think. This is further reinforced by the federal reserve committee who released guidance on future interest rates and expect them to come back down within a few years. 

The Ugly: Are daily 10 basis point swings in yields the new normal?  

One of the more shocking developments that we’ve seen in the market over the last month is the magnitude of the swings in bond prices/yields. 

The Fed is beginning to lose not only the narrative battle about how serious inflation is, but also the credibility to accurately forecast growth, employment, inflation… basically anything. The Weather Network has been more accurate than the Fed these days. As a result, any time one of the Fed committee members gives a speech or speaks to a media outlet, the market goes berserk trying to digest what they are saying and interpret how it will impact future Fed announcements.

You’d think they’d keep these interviews to a minimum, but there was one every day this week. 

Bottom line: although it’s impossible to time the market, for real estate investors looking to manage their interest rate risk, steps you can take include:

  • monitoring market conditions,
  • keeping an eye on central bank announcements/data releases, and
  • getting in touch with your First National advisor to gain perspective or hear your options

A few final items to consider:

Residential mortgage rates are up about 65 basis points from the beginning of February, and we aren’t far off from hitting rates that begin with a 4 handle. It will be odd, and possibly even a first, for many to renew at a rate higher than what they had before. Could the higher rates end the bull market and drive more families to rentals? And if so, are we building enough apartments to support this shift? 

Lastly, you may be thinking to yourself, what about the tragic conflict going on right now in Ukraine and Russia and what impact is that having on the market? It’s hard to imagine but the market is already beginning to look past this ongoing war – the headlines are few and far between even with daily attacks. 

On that note, I hope you enjoy your weekend. If only the market could win an award at this weekend’s Oscars for best picture, as there has been nothing but drama.