Interview with Odlum Brown Strategist on whats to come from interest rates

If you haven't had enough opinions offered or articles about what to expect in the coming months and years, here's some great points from Hank Cunningham, Fixed Income Strategist for Odlum Brown with over 40 years experience.

These excerpts are from Canadian Mortgage Trends http://www.canadianmortgagetrends.com/
an invaluable resource for what's going on in the mortgage world!

On long-term interest rates…

Hank: I don’t see much upward pressure on rates—not in the developed world. There’s no inflation to speak of. In fact, inflation continues to recede in most places if anything.

On the European debt crisis…

Hank: The sovereign debt issue is a major problem, but it’s confined to a part of the globe where it’s not going to have a material impact on the rest of the world. Certainly not from a growth point of view.

On long-term rates one year from now…

Hank: You’re going to see a flatter yield curve looking out a year. The spread between a 1-year mortgage and a 5-year mortgage is going to be a lot narrower. The yield curve is still steep right now. I think (mortgage) clients are still better off floating than they are fixing.

One of the other things you have to think about is the amount of debt coming due by governments. The U.S. has 40% of its debt maturing in the next three years. They don’t want higher inflation and interest rates.

On inflation risk…

Hank: Inflation is just under 2% in Canada. In the U.S. it's under 1% actually.

The 5-year rate might go up a bit, but the market will get anticipatory (and discount the Bank of Canada’s future rate increases)…and then, longer-term yields should come back down. People tend to underestimate the discounting nature of the market.

Note: I have removed a great technical analysis of effect bond yields to save some of you from getting too detailed, if you'd like to read more http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2010/06/1-on-1-with-hank-cunningham.html

On economists’ forecasts of the Bank of Canada…

Hank: Economists generally do straight line forecasting. They don’t allow a lot of room for (unexpected) changes in the marketplace. Rate forecasts depend on your view of the world. My view of the world is one of growth with very little inflation. In that scenario there is no need for serious tightening. Market rates will rise if the demand for money rises. The market really acts independently from the Bank of Canada, as you know.

On where we go from here…

Hank: The BoC has already indicated that rates are going up. It (the hike in June) won’t be the last increase in the Bank rate. You’re going to see a flatter yield curve for sure.
The banks have been funding longer-term mortgages with short-term money. They pay nothing on savings and charge 4% for a mortgage. It’s been easy arbitrage. In 12-18 months that will be over.
In the meantime, people with mortgages will be “forced” to fix at the wrong time, right before rates come back down again. It happens, and it’s going to happen again. We’ve already had one false move in rates.

On going fixed or variable…

Hank: Money has been cheap. If people have fear of rates rising, you can fix right now and still have cheap money. I have no problem recommending that. But if you’re playing it close to the chest, I would stay floating right now.

Have a great weekend!

Peter McKinnon
http://www.peterlmckinnon.com/
peter_mckinnon@centum.ca