Advising during a generational changing event is obviously more challenging than during normal periods where trends evolve more slowly. The dramatic movement in the GOC which began in March of 2021 caught most financing professionals and borrowers off balance. We had commented in our Winter 2021 Newsletter that the Bank of Canada had begun a policy of quantitative easing in an attempt to keep interest rates low. While this may have had the desired effect on prime rates, that certainly did not occur with GOC bonds.
Through the later part of 2020 and into the first couple of months of 2021, the Canadian Government was purchasing in the order of $5B in bonds per week. Through this same time period and into early February 2021, the 5 year Bond was trading closely around the 40bps level. The impact of quantitative easing then began to be reflected by upward pressure on bond rates. By the end of February and into the first couple of weeks of March, the 5 year moved up into the 100bps range and has retained that level through to the end of the month. Current policy which would come into effect in April 2021 would see purchases falling to $4B per week and a possible further reduction in Fall 2021 to $3B per week.
Can the reduced tapering purchase of GOC allow for some downward pressure in bond rates? How does the specter of increased inflation as the economy comes out of this pandemic later in 2021 and into 2022 impact the potential for increased borrowing costs? As the TSX begins to flirt with levels close to 20,000, will investment in real estate look to be a safer harbor? Are current GOC prices reflective of what is required to purchase a financial instrument in uncertain economic times?