For the past six months, Canadians have been reading warnings about the need to prepare for interest rate shock.

At the same time, we’re being told that the U.S. bond market is signalling that the economy south of the border is in trouble, which could affect our interest rates.

Are we in danger?

The U.S. bond market
In the past few weeks, bond yields have declined and are at less than 1%.

While it’s true, bond yields decline when economic conditions and prospects are poor, and bond yields rise when growth prospects are bright and robust, in this case, there are other reasons for the low yields.

These include geo-political concerns and uncertainties including Middle East tensions, terrorist attacks, and the Russia-Ukraine situation, which are all causing what is known as a “flight to safety.”

Capital typically flows to safe, secure assets such as US-government bonds. But when there is uncertainty, it flows elsewhere.

However, in this case, the declining U.S. bond yields do not necessarily mean the US economy is headed for tough times.

In fact, the opposite is true.

The US economy is expected to grow at a faster pace in 2015 than in 2014, according to a forecast released today by the International Monetary Fund which raised its growth forecast for the U.S. economy to 3.5% for 2015 and 3.7% for 2016.

Interest rates
The U.S. Federal Reserve will increase interest rates sometime this year, for the first time since the 2008/09 recession.

In Canada, the Bank of Canada will not be raising interest rates this year and will likely wait until 2016.

Given the drop in U.S. bond yields, it is likely Canada will see a cut in mortgage rates in the short term.

Even when rates do start moving upwards in 2016, the increase will be very gradual.

Canadians who are already over-indebted will notice the increase. But for the vast majority of Canadians, the increase in what they pay on their mortgage will be nominal.

Source: Helmut Pastrick, Chief Economist, Central 1 Credit Union

Andrew Peck and Helmut Pastrick

Andrew Peck, vice-president & general manager talks to Helmut Pastrick, chief economist, Central 1 Credit Union.
Richard Stewart, Mayor of Coquitlam (Standing)