Posthaste: Investors are demanding more to hold Canada's debt — and we're all are paying the price
Bond markets are rallying after news of a possible peace deal in the Middle East, with yields dropping around the world on hopes of that inflation will stay contained and central banks will keep their powder dry.
But long-term yields didn’t fall far and chances are they won’t stay down because bigger forces are at work here.
“Even if a permanent de-escalation were to come to fruition, the risk that the long-end remains high is very real,” said National Bank of Canada strategists Kyle Dahms and Taylor Schleich.
They estimate that the average 10- and 30-year borrowing cost in the G7 ended April at a 17-year high, “(and we remain within a few basis points of these levels today).”
“The lack of fiscal discipline combined with a high level of geopolitical risk will continue to put upward pressures on term premiums going forward,” they said.
Term premiums are the extra compensation investors demand for holding long-term government bonds. A key reason they are staying high is investor concerns about rising debt.
The pandemic raised public debt levels, but these have continued to climb as new shocks hit including Donald Trump’s trade war and most recently the conflict in the Middle East. Higher military and defence spending have also contributed.
“As a result, governments across advanced economies are issuing large volumes of long-term bonds at a time when the supply of these bonds is already elevated,” said a study by the Bank of Canada .
The bank said market intelligence gathered through conversations with financial market participants suggests that a key factor to the increase in term premiums is “growing unease” about whether the market can absorb such a large volume of government debt.
During the pandemic central banks bought up a significant share of the new issuance, which kept yields lower. Now these banks have wound down those programs and in some cases are selling bonds on the secondary market, said the study.
Private investors have stepped in to pick up the slack, but are seeking higher compensation.
Canada’s inflation and fiscal balance sheet may be in better shape than many of its G7 peers, but it’s not immune to these pressures.
As a small open economy, Canada’s long-term government bond yields are heavily influenced by global forces and closely track U.S. Treasury yields, said the Bank of Canada . Over the past 20 years the term premium for yields on 10-year government bonds has moved in tandem with other advanced nations.
Since 2023 that premium has increased and is now at levels not seen in over a decade, said the bank.
Why is this important to you and me?
“Yields on long-term government bonds play a crucial role in the economy by directly influencing the interest rates charged on mortgages and business loans,” said the Bank of Canada.
So the more investors demand to hold our debt, the more we pay on credit cards and mortgages and that in turn drags on the economy.
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Whether artificial intelligence is taking jobs is a contentious debate with not a lot of data nor a lot of consensus on causality.
Research suggests that in the United States, jobs for younger workers aged 22 to 25 in AI-exposed occupations are declining by about 16 per cent, while employment for experienced workers remains stable, says a report from Desjardins Group.
Some examples of AI-exposed jobs would be customer service representatives and computer programmers.
Similar findings have yet to show up in Canada, where AI adoption has been slower, but, as today’s chart shows, that hasn’t stopped Canadian workers from worrying about it.
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McLister on mortgages
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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
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