CMT: The good news is that bonds might become interesting when the yield is between 4% and 5%.

Phil: It is amazing to see the move in the bond markets subsequent to the bank’s move. In a mere week, bond yields have gone up more than 50 basis points.

Just one man’s opinion, but I think a 3% BoC rate is plenty of stimulus for the economy – someone who is willing to borrow money at 2.75% interest rate to invest should be able to make money at 3%, so in terms of economic stimulus, I don’t see much difference between 2.75% and 3%. In fact, I think a 4% rate is also stimulative for the economy – most businesses should be able to make a lot more on profit margin than a 4% interest rate would eat up. The big problem is obviously that now the big 5 banks are gun-shy. They won’t be lending out money to any Tom, Dick and Harry anymore – so no matter what the BoC does, the banks which are the conduit for that money may be stoppered. As a result, those precious few basis points would have more of an effect on inflation than on the economy.

That said, I think the US recession is going to eventually spill across the border to Canada anyways. Lowering interest rates may delay the recession, but I think a Canadian recession will be inevitable… I think we might as well defend the currency so that our purchasing power doesn’t get obliterated like I think the savings of US retirees will be by the inflation monster… In other words, we shouldn’t try to follow the US economy down the path that they have chosen… It looks very dark and creepy.

It’s interesting how much bond yields ramped up after the BoC’s announcement. 12 of 12 primary securities dealers got the call wrong. These are people with more money and information than they know what to do with.

It really is humbling, and it shows how little any of us can ever really know about the direction of interest rates (even short-term!).

Have a great weekend,
Rob