As investors do not pay as much attention to bond markets as they do to equity markets, it is worth nothing that in recent weeks bond yields have been heading higher. After setting a low of just under 2 percent at the beginning of Q4 of this year, the yield on the Government of Canada 5-year bond has increased steadily to 2.58 percent.

Increasing bond yields is not exactly good news for borrowers. Banks have started increasing the interest rate on mortgages. TD Canada Trust, for instance, announced yesterday that it is hiking the rate on a 5-year closed mortgage by 20 basis points to 4.24 percent. If you are homeowner and your fixed-rate mortgage is coming up for renewal, you may want to shop around and lock in a lower rate that is still available through other lenders. Slightly higher rates are no reason to panic because the Bank of Canada expects interest rates to stay low for a long period. But note the caveat: households should make sure that they can the service their debts at normal interest rates.

Higher bond yields should offer some cheer for savers who have suffered through a period of abnormally low interest rates. However, increasing bond yields also means that existing holdings will fall in value. Bond investors may want to consider shortening the duration of their bond holdings.

This article has 11 comments

  1. Great advice. Investors need to understand the great risk of being in long term bonds at this time. If you get a chance check out my article “The Case Against Bonds” and leave me a comment: http://tinyurl.com/333q6hy

  2. Au contraire! Not only am I a stock picker, I am also a bond picker in my RSP and TFSA accounts. Even with the drop in bond prices, I’d have to say that rates are still disappointingly low across the board from GoCs to Provincials to Corporate bonds. After commissions, these days it’s next to impossible to find a 4% yield (5-yr maturity) in anything but low quality unsecured (junk) bonds.

    In my opinion, these days it’s still best to build a ladder of CDIC insured GICs in fixed income portfolios, until interest rates recover to a more “reasonable” rate.

  3. Ultimately, interest rates will be moving up, but i wouldn’t bet on major hikes in 2011. Even a +100bps hike will still keep us in a historically low interest rate environment.

  4. @Phil: I agree with you. A normalized yield on a 5-year GIC with inflation target at 2 percent is likely between 3.5 to 4 percent. We are not there yet. GIC yields are not reflecting the recent pick up in interest rates just yet. However, it’s hard to say when we’ll get there. If you look at Mark Carney’s statement, he doesn’t expect us to be there for a very long time.

    @BTI: Agreed. That’s essentially what Mark Carney is saying. The expectation is for interest rates to remain low for a long time.

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  6. up today, down tomorrow. It means diddly, the bond market has been a small roller coaster in the last year and will remain one for a while longer.

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  10. I find it funny all the blog’ers come out about bonds well after the move…it’s not the last two weeks,this move started back in Sept…..if your adviser didn’t light up on bonds,an more to Eq’s…well guess what you don’t have an advisor…just a sales person….but i’m sure he/she has that meeting set up for Jan.

  11. Buy XSB, CDZ,XTR,ECW in a % you are comfortable with and DRIP proceeds, ignore until you or your Estate needs the monies.