Renaissance

In case you missed it in your pre-turkey enthusiasm on Friday, Canada’s back.

The jobs report for September was boffo. More than 157,000 new hires when the pointy heads on Bay Street had predicted just sixty grand. The unemployment rate went below 7%. That’s a big deal, since it was 14% through parts of 2020.

We’ve now regained all the jobs the slimy little pathogen wiped out. Our numbers are better than those in the US, where Friday’s print was a big miss. A a result, Canada bonds sold off and yields spiked. The dollar hit the highest level in a few months. And combined with oil at $80 – on its way to a hundred bucks, many people say – this is heady stuff for Canuckistan and its newly-reelected merry band of federal spenders.

Source: Statistics Canada; Bloomberg

By the way, the jobs numbers were even more impressive being all full-time positions, with almost 140,000 people coming back into the workforce. That brings our participation rate to 65.5%, the best number since this damn pandemic started.

Here are some of the implications and how this may impact your life.

The yield on two-year Canada bonds has hit the highest level since the early spring of 2020, when we had no idea what lurked around the corner. Benchmark five-year Canadas are near 1.3%, compared with 0.75% in August. Do the math – that’s a 70% hike.

Canada 5-year bonds yield surge 70% since August

Source: Investing.com

The bond market is telling you something – the Bank of Canada is about to throttle back on its stimulus spending, since it can no longer be justified when the labour market has roared back. Analysts widely expect our CB to cut its bond-buying program in half, from $2 billion a week to one billion later in October. That will stop the Covid-caused bloating of its balance sheet.

As you know, by snorfling up bonds in this way (at one point the bank was buying $5 billion worth every seven days) the bankers were intentionally suppressing yields to keep lending rates in the ditch. That was a trick to make moisters borrow like crazed beavers and jack house prices up by 30%, thereby creating economic activity (and lots of debt). It worked. They bit.

The five-year Canada bond yield, by the way, is the best indicator of long-term mortgage rates. So expect increases in the next week or two. As mentioned last week, the BoC’s benchmark rate will not likely move for a few months, so VRMs will remain the cheapest way to borrow. For a while.

Now while higher yields mean lower debt prices and your bond funds have probably sold off, it’s a far different story for preferred shares – at least the rate reset kind. This pathetic blog has been yakking about this opportunity for months now and explaining why a balanced portfolio should have about half its fixed-income (safer) portion in prefs.

Check out how this preferred ETF has been doing lately if you want to know where the market thinks rates are headed…

Rate reset preferreds take off along with bond yields

Source: TradingView.com

In the States the latest jobs report was a disappointment, but still robust enough to expect the US central bank to do exactly the same. It’s called ‘tapering’ and simply means the stimulus program will end there, too. The key 10-year Treasury (bond) is now north of 1.6%, or double the level of a few months ago. Higher rates are generally bad news for tech companies, which is one reason markets have been volatile lately (along with Chinese real estate). But some Wall Streeters are now convinced the correction (as puny as it was) is kaput. They’re looking for new highs.

Meanwhile, chew on this…

• Supply chain problems will get solved, just like lumber prices did.
• Covid is over. There’s even a pill coming.
• Bond yields, interest rates, government spending, inflation and taxes will all be higher in 2022.
• Pandemic income supports will end.
• Vaccination rates will touch 90% in Canada.
• Nobody will renew a mortgage at 2%.
• Your balanced, diversified portfolio will be peachy.

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