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March 6, 2020 | Shelter in Place

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Good jobs numbers last month couldn’t keep stocks aloft on Friday. Mr. Market is still trying to figure out how much damage that gnarly little germ will do to the economy.

As equities swoon, money gushes into bonds. Safe stuff. For example, a boring bond ETF like XBB has gained about 6% this year while stocks have plopped. Bond prices rise when trouble comes to town. And as prices go up, yields go down. The debt market is also repricing risk, now signalling now a recession looms. When that happens corporate profits fall, equities reflect it and people shelter inside bonds – no matter what they pay.

So this is a unique time. Central banks cutting. Primes, mortgages and savings rates on the decline. Government debt – considered to be a “risk-free” asset – in big demand and yielding next to nothing. The return on the benchmark Government of Canada bond, for example – at just eight-tenths of one per cent two days ago – has collapsed to six-tenths. In fact the same bond that paid 1.7% at Christmas is now at 0.66% – a drop of more than 60%. In ten weeks. Stunning.

Down she goes! Canada bonds lose 1% in weeks.


Investors are pushing yields towards zero as US Treasuries hit a new record low. The rush into bonds is now at historic levels. People can’t get enough – you know, like toilet paper.

This weird behaviour is likely to last for a while longer, and I hope it underscores the wise (but oft-maligned) advice on this pathetic blog to always have a strong fixed-income component in your portfolio. Government bonds. Corporates. Provincial debt. Together with a little cash this should be about 25% of a balanced account. Nobody owns bonds anymore to collect interest. They’re there as a shock absorber in normal times, and for growth when everyone loses their mind (that would be now).

So, what next?

Lower rates, that’s what. The Bank of Canada ain’t finished, even after that blockbuster half-point raspberry on Wednesday. The next cut looks like it will take place in April, with another one or two after that. Yup, a drop of .75% from now. Yuge. And American rates – already lower than ours – are headed for the big goose egg.

This means if you’ve been shopping for a GIC, lock in now – even though that’s no long-term way to fund your retirement. As for mortgages, variables are hot since loan costs drift lower with the central bank and prime rates. With 2020 destined to deliver two to four more declines, this looks like a no-brainer choice. These days VRMs are in the 2.2% range and five-year fixed mortgages are 2.4%. Both are headed south. So if you’re getting pre-approved make sure you have a commitment to pass through any declines prior to the closing date.

Earlier we speculated what this might do to the residential real estate market, especially in Toronto, Ottawa, Montreal and (to a lesser extent) Vancouver. More buying power unleased. A lower stress test hurdle. Unfettered hormones, just in time for rutting season – and when listings have been scant. It’s a recipe for bubble prices, multiple bids, blind auctions, happy realtors and billions more in new mortgage debt. Sadly, it will push home ownership further away for many.

But we also need to understand stock markets do not fall nor bond prices spike in isolation nor without consequence. Canada’s run into big headwinds lately. The crashing price of oil. The FN protests and damaging rail blockades. The pipelines bottleneck. Political polarization. The clash between climate change and the energy sector, resulting in a flight of capital. Now the virus.

Yeah, home loans are cheap. Historically so. Going to get cheaper, too. But recessions bring job losses, and this may be a poor time to choke down a bulging wad of debt.

Maybe you should wait. There are better opportunities, less risk. Like selling bumwad and baby wipes from your van. Seriously.

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March 6th, 2020

Posted In: The Greater Fool

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