Typically, when we see stock markets rallying up we also see bond yields go down, and many ask the question “why does this happen?”. What’s important to keep in mind as mortgage consumers or bond market investors is that bond (debt) markets and stock (equity) markets are all essentially competing for investment dollars at some level all the time. For this reason, a bullish equity market would pull investor’s funds (which are limited) away from the bond (debt) markets and see them redeployed into stock (equity) capital markets.
When money is flowing from bonds toward the equity markets, this lowers the demand for bonds and the sellers of these bonds (both government and corporate bonds) would be forced to lower the prices of the bonds to continue to attract capital and the necessary funds to their sector. Now keep in mind that when bond prices go down – bond yields go up. This can be more simply explained if you look at the fact that that bonds trade at a discount to the face value of the bond, and consider that the return investors earn is comprised typically of the coupon rate and the difference between the market price and face value of the bond. The larger the discount from face value, the greater the yield to maturity for the investor – therefore the investor yield goes up as the price of the bond goes down. It is this increase in yield that ultimately attracts investors back into investing in bonds when equities rise. Investors simply seek the most effective (risk-adjusted) home for their investment dollars.
Essentially – what we see in short term market dynamics is when stock indexes rise, they in turn push bond prices lower and thus bond yields higher (all else equal). It is for this reason that we often see a quick rally in the stock market push up the yields on mortgage rates – at least in the short term. Since the Canadian bond market is closely correlated with the US bond market – rising yields south of the border often push up our bond yields and thus raise fixed mortgage rates here in Canada.
I would like to quickly point out that there are a plethora of other market dynamics in play at any given time. While much of macro and micro economic theory is predicated on a concept called “ceteris paribus” which is a latin phrase meaning “other things remaining equal”… we all know other things don’t remain equal in the real world. Monetary policy, fiscal policy, inflation and geo-political economics are always at play at varying levels of relevance.
A great financial advisor is constantly on the watch for things that could possibly compromise your wealth goals and/or create buying opportunities in the market. You could of course go complete an MBA in finance, earn your own CFA, CFP, PFP, or get a Masters degree in Economics and watch this stuff yourself every single day. Personally – I would simply work with the best wealth management experts and industry leaders so that you can focus on what you do best, and let the professionals on your team worry about this on your behalf.
No mortgage or financial planning team in this country does more borrowing to invest or borrowing for wealth creation than our team. We have the business track record and formal education to support your plan and to help you achieve your financial goals. Volatile markets create opportunities and we would love the opportunity to help you capitalize. Call our office today to discuss how we can help at 1-855-410-9905 or email ClientCare@CalumRoss.com