With both Canada and the U.S. currently on an interest rate hiking schedule, expectations that higher yields may be coming in the near future are pushing bonds down.
Due to the fact that bond prices are inversely related to yield, and therefore interest rates, an environment in which rates are rising for the first time in decades can be seen as a reason to avoid the bond market altogether. After all, if investors are able to get a better yield tomorrow on the same treasury security, why not do so?
With Canadian five-year government bond yields trailing the same U.S. treasury notes by approximately 50 basis points (bps), the argument that buying Canadian government bonds at this point in time makes sense is a difficult one for many to consider. After all, wouldn't every investor want to pick up a "free" 0.5% for five years?
A number of economists and analysts have pointed to the fact that while the U.S. may continue to raise rates aggressively, the highly indebted nature of the average Canadian household may force the Bank of Canada to hold off on raising rates as quickly as its American counterpart.
This could lead to Canadian government bond yields lagging behind treasuries in the U.S., supporting bond prices in the near-term while providing a decent yield in the medium-term for investors looking to hoard cash.
Invest wisely, my friends.
