Rates are on the rise again

Here we go again! Rates are on the rise.

Last week, Federal Reserve Chairman Ben Bernanke, hinted that they may reduce their program of buying U.S. $85 billion of bonds every month.

What does this mean?

Well, many or almost all of the banks and lenders loan and mortgage portfolios are directly based on the bond market pricing. Lenders borrow their funds from the bond market to price their loans.

With the U.S. treasury pumping $85 billion directly into those markets, they are directly affecting the pricing of loans and mortgages.

It’s a simple demand versus supply strategy.

To stimulate the economy consumers need a reason, and they also need confidence that they are buying at the right time.

So with the U.S. treasury buying all of these bonds, this does two things.

First, they are lowering the cost of the bonds by purchasing a large portion of that market, thus decreasing the demand for them. This then decreases the yields (another fancy word for profit) making it very unattractive to the investing market, making them invest directly into the stock market where the gains may be larger. This means that investors will invest more in the stock market as opposed to the safe bond market.

Second, with this decreased yield on the bond, mortgage lenders and banks have access to an extremely cheap funding source for their mortgages, thus the super low interest rates we’ve been having.

When the economy turns the proverbial corner, consumer confidence returns as jobs return, and with great news, the U.S. treasury can look at decreasing its exposure to the bond market.

When there’s good news, economists and heads of state bankers can ease off of the gas pedal in funding the markets. Essentially, these low prices are a falsehood as it is the government that has provided the stimulus thus creating stimulus for the economy, once they remove their pressure from the bond market as the economy recovers fully on its own, then we will see interest rates rise to where the market directly affects the pricing as opposed to government intervention.

As long as the U.S. economy keeps moving along into positive economic territory, then we‘ll see interest rates rise even further. This could be the end of this low interest rate ride. We’ve been saying it for years that it wasn’t going to last forever, and it might just be coming to a head.

Jean-Guy Turcotte is an Accredited Mortgage Professional with Dominion Lending Centres Regional Mortgage Group.

Just Posted

Yellow Vests protestors take to Red Deer streets

Trudeau government’s immigration and oil industry policies denounced at rally

Rebels lose to Medicine Hat Tigers, 4-1

Tigers break Rebels’ three-game winning streak

Red Deer’s newest outdoor ice facility opens to the public next week

The speed skating oval at Setters Place at Great Chief Park will be open Dec. 17th

Exhibition explores the rich history and culture of Métis people

The exhibition is on display from Dec. 15th to March 10th at the Red Deer Museum + Art Gallery

2019 Hockey Alberta Provincial Championship host sites announced

A total of 39 Provincial Championships will be hosted across the province

Trudeau to make it harder for future PM to reverse Senate reforms

Of the 105 current senators, 54 are now independents who have banded together in Independent Senators’ Group

Light at the end of the tunnel for UN climate talks

Meeting in Katowice was meant to finalize how countries report their emissions of greenhouses gases

Supreme Court affirms privacy rights for Canadians who share a computer

Section 8 of the Charter of Rights and Freedoms protects Canadians against unreasonable search and seizure

Janet Jackson, Def Leppard, Nicks join Rock Hall of Fame

Radiohead, the Cure, Roxy Music and the Zombies will also be ushered in at the 34th induction ceremony

‘I practically begged’: B.C. woman with breast cancer denied referral to Calgary

Breast cancer patient left to fight disease alone after being denied referral to Calgary

Facebook reveals bug gave apps unauthorized access to 6.8 million users’ photos

It’s believed up to 1,500 apps built by 876 developers had access to Facebook Stories, private photos

21 detained before Paris protests as police deploy in force

There was a strong police presence outside the central Saint Lazare train station, where police in riot gear checked bags

New home for Calgary Flames estimated to cost up to $600 million

The city and the Flames are not yet talking on who will pay how much for a building to replace the Saddledome

Family searching for B.C. professor last seen at Colombian salsa club

Ramazan Gencay, a professor in economics at Simon Fraser University, was last seen in Medellin

Most Read