Skip to main content
Access every election story that matters
Enjoy unlimited digital access
$1.99
per week for 24 weeks
Access every election story that matters
Enjoy unlimited digital access
$1.99
per week
for 24 weeks
// //

Members of Generation Y see the value of getting into the market as early as they can, experts say.

Fred Lum/The Globe and Mail

In a sign of things to come, a seemingly innocuous sentence fragment from new Fed chair Janet Yellen, "six months, something like that," caused a mammoth flinch throughout global asset markets. Gold and U.S. bond prices plummeted almost before she had finished the sentence, and the S&P 500 shed almost 1 per cent in five minutes.

Ms. Yellen's comment was a response to a question regarding the time lag between the end of the Fed tapering its stimulus and its tightening interest rates. That time frame would put a Fed rate hike in the first half of 2015 – at least two quarters earlier than markets expected.

For Canadians, this makes Ms. Yellen the leading candidate for pricking the Canadian housing bubble.

Story continues below advertisement

The chart this week shows that even if the Canadian and U.S. economies are moving in different directions, Canadian yields track U.S. yields very closely. Over the past decade, Canadian five-year bonds traded with yields only 16 basis points away from U.S. Treasuries, on average.

When U.S. rates rise, government of Canada bond yields climb with them, whether this makes sense based on the domestic economic backdrop or not.

Mortgage rates follow five-year bond yields. So, as the expected Fed rate hike approaches, markets will begin pricing in a chain reaction – U.S. bonds yields will rise, causing Canadian five-year bond yields to climb, and this will result in higher Canadian mortgage rates.

The futures market currently predicts that LIBOR – the interbank lending rate that serves as the benchmark for global fixed-income markets – will climb by about 50 basis points by September 2015. The Canadian five-year bond yield may not rise as much, but Canadians can expect five-year mortgages to rise by at least 25 basis points.

A small increase in the mortgage rate could have an outsized effect on the housing market because it chips away at affordability at a time when home prices are already stratospheric relative to income and many Canadians are deep in debt.

To a significant degree, the Fed helped drive the Canadian housing boom – so, it's only fitting that Ms. Yellen is the architect of a downturn. From the U.S., Canada imported lower rates than the economy warranted after the financial crisis, and this increased demand for housing.

The flip side of that coin will be apparent as rates rise south of the border.

Story continues below advertisement

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies