November 17, 2016

Paul Rocha

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“Trumpflation”, What is It And Should Canadians be Worried

A week after Donald Trump’s blind side win of the US presidential elections, some curious things are starting to take shape in the financial markets.

To start with, the stock markets have soared, many hitting new highs. In fact, the Dow marked it’s biggest weekly increase in 5 years. This is largely based on the belief that Trump’s fiscal policies of lowering taxes and increasing infrastructure spending will be good news for business.

The bond markets on the other hand have plummeted, so severely that some experts are calling an end to the 30 year bond bull market. US Bond investors were faced with a $1 trillion loss, in the first 4 days following the election. The reason for this dramatic, almost apocalyptic drop is the underlying fear that Trumps perceived tax cuts, and massive infrastructure spending will be inflationary for the US. Thus the recently coined term “Trumpflation”.

Trumpflation effect on Financial Markets

Effect of Trump Economic Policies on Financial Markets

So how does Trumpflation affect the Canadian mortgage market? Bond prices and bond yields have a negative correlation. So as bond prices increase bond yields decrease, and conversely, as bond prices decrease, bond yields increase. Fixed term mortgage rates are largely based on the bond markets, and as bond yields increase so to do mortgage fixed rates. Canadian bond yields closely follow our US counterparts, and in fact the Canadian bond market has seen a substantial increase over the last few days.

Mortgage Rates Going Up?

Trumpflation in itself could be troubling for the Canadian Housing market, but coupled with the recently revised mortgage stress test rules announced by the federal government, Canadians could potentially be facing mortgage hangover. Last week TD announced a 15 basis point increase in it’s prime rate, used to calculate variable rate mortgages, and yesterday RBC announced an increase in it’s 3, 4, and 5 year fixed rate mortgages and a further increase for clients choosing 25 year amortization or longer.

Stay tuned, as the next couple of weeks could be vital for the Canadian real estate market

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