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A daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow

BMO economist Robert Kavcic again warned about the state of the domestic housing market, this time noting upward pressure on mortgage rates,

“Canadian 5-year government bond yields are now trading above 3% for the first time in over a decade. This is a massive reversal from the 0.3% pandemic low set around mid-2020. Those who were lulled into thinking that pandemic-era interest rates were the new normal are getting a bit of a rude awakening with respect to financing costs. As an example, the last time the 5-year sat around this level in 2007-08 (before the downturn), 5-year fixed mortgage rates were typically north of 5%. We seem headed in that direction, which would have been inconceivable for many in recent years. Meantime, surging 5-year yields reflect the market view that short-term rates will be close behind, so there won’t be any hiding in variable rates”

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Scotia strategist Hugo Ste-Marie detailed the accelerating outflows from U.S. bond ETFs,

“After years of sustained inflows, the bond market rout is leading to an investor exodus ... Outflows from bond ETFs and bond funds have been accelerating in the first four months of 2022, with outflows totalling US$46-billion in April. Preliminary data for May shows an even larger outflow - in the neighbourhood of US$55B, which would bring year-to-date outflows around the $170B mark. With US bond yields spiking across the maturity spectrum yesterday, the epic bond rout continues unabated ... The Bloomberg US Treasury Bond index (TR) is suffering its worst drawdown (-13%) since its inception, with the index being down 3.9% quarter-to-date and 9% YTD. Bond investors should keep an eye on the US CPI report on Friday (consensus 8.2%) as it could inflict further pain to bond holders if it comes out on the strong side. Our model still sees upside for US 10-yr yields over time, with a fair value oscillating between 3.25% and 3.50%.”

There is enough liquidity in developed world government bond markets to prevent anything truly terrible happening as a result of this trend but if the selling spreads to corporate bond ETFs, where the liquidity of underlying issues can be a problem, those markets could get messy.

“Scotiabank: “Bond Outflows Accelerating”” – (research excerpt) Twitter

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The Financial Times’ Jonathan Wheatley detailed World Bank concerns about rising pressure on developing world credit,

“The fallout from the [Ukraine] war will exacerbate the effects of the pandemic, leaving 75mn more people in extreme poverty than expected in 2019, the bank warned in its latest economic outlook, published on Tuesday … Ayhan Kose, head of the bank’s economic forecasting unit [said] “The faster-than-expected tightening of financial conditions worldwide could push countries into the kind of debt crisis we saw in the 1980s. That is a real threat and something we are worried about.” … World Bank data show that foreign debt in low-income countries rose by $15.5bn to about $166bn in 2020. Foreign debt in middle-income countries rose by $423bn to more than $8.5tn, leaving them especially exposed to sharper than expected interest rate rises.”

“World Bank warns of debt crisis risk as outlook worsens” – Financial Times (paywall)

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Diversion: “Remarkable Drug Trial Ends With All 18 Patients Cancer-Free” – Gizmodo

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