Rates Going Up? | Page 2 | General financial discussion | Discussion forum

Norman1 said

zgic said

Are rates not driven by inflation in Canada (They should be concerned by job market like the US) and Inflation and Job market in the US (dual mandate)?
Because no one knows what the markets will do tomorrow correct? (as per Warren Buffet)

Short term rates are driven by where the central banks believe inflation (and perhaps, in the US, jobs) will be in 12 to 18 months or so. That's how long it is expected to take policy rate changes to fully affect the economy.

Central banks don't usually get involved in long term rates. Consequently, long term rates fluctuate with the investor supply and demand in long term bonds.

What Warren Buffet wrote is nuanced. Markets are not completely random. But, any strategy that needs accurate predictions of the markets is not going to work well. Strategies that don't require accurate predictions can work out quite well. Two examples that come to mind are the strategies used by lottery corporations and insurance companies.  

So Norman1 is this conclusion correct:
Short term rates - CBs (So we can know what we will get for a 1 year or max 2 year)
Long Term Rates - Traders based on short term rates and mortgage supply and demand. US 30 year and Canada it will be more fluid due to the shorter mortgage terms. (These will be always lower than the short term)

So being in short term GICs will always be better.

zgic said

So Norman1 is this conclusion correct:
Short term rates - CBs (So we can know what we will get for a 1 year or max 2 year)
Long Term Rates - Traders based on short term rates and mortgage supply and demand. US 30 year and Canada it will be more fluid due to the shorter mortgage terms. (These will be always lower than the short term)

So being in short term GICs will always be better.  

CBs set overnight rates.

Everything else, including 1 and 2 year rates are set by market forces.

Governments can increase supply of bonds over a particular period of time (to address government borrowing needs) but demand is determined by whoever buys bonds. Ok, recently CBs have been easing/tightening which has an impact but does not change the gist of whats happening.

Not sure how you came to the conclusion that “short term GICs are always better”. Better than what? Long term? In general longer term bonds and GICs carry more risk (e.g that interest rates will rise) and therefore provide more reward. But… Not always the case. Hard to predict the future. And right now we have even more uncertainty than normal.

I have always (and still do) considered the US system of tax-free interest payments really destructive. It rewards the maintenance of housing debt instead of paying it off and putting that money into something more productive.

zgic said

So Norman1 is this conclusion correct:
Short term rates - CBs (So we can know what we will get for a 1 year or max 2 year)
Long Term Rates - Traders based on short term rates and mortgage supply and demand. US 30 year and Canada it will be more fluid due to the shorter mortgage terms. (These will be always lower than the short term)

So being in short term GICs will always be better.

Unfortunately, that's not the case.

As mordko explained, the central banks set the short term rates. Like overnight, 30 days, and 90 days. Rest is up to the market.

The central banks are not really interested in GIC rates. They are interested in the borrowing rates. Borrowing costs for businesses, mainly the variale rate lines of credit, are how central banks try influence the economy.

The inverted yield curve now, where short term rates are higher than long term rates, is not normal. Normally, longer term rates are higher than short term ones.

Norman1 said

the central banks set the short term rates. Like overnight, 30 days, and 90 days. Rest is up to the market.

Central banks can make direct influence on longer term rates through quantitative easing (QE) or tigtening (QT).

Post #29 is correct in that BoC can influence bond yields >1 year through QE or QT (buying or selling bonds). There are numerous sources of information on this phenomena on the net. This simple explanation is just one of them https://betterdwelling.com/canadian-borrowers-to-feel-bank-of-canadas-qt-in-2025-nbf/ and if one wants greater depth on the subject, https://www.bankofcanada.ca/2024/06/exceptional-policies-exceptional-time-quantitative-easing-quantitative-tightening/

At the end of the day though, it is indeed the sentiment of the huge bond market that establishes the yield curve.

Norman1 said

smayer97 said

False comparison of CBs to company earnings... sheesh.

But you just said exactly what I have always said, without realizing it,; just different conclusion. "The traders watch the same things the central banks say they watch and ... anticipate..."

The markets anticipate... and lead the way as a result. …

No, markets do not lead when they move ahead of time to where they expect the central banks to be on the rate dates. The leader is the central bank and the market is the follower. Market is following/chasing the central bank.

Just like the leader is the hockey puck when the hockey player skates to where he/she thinks the puck will be. Only the uninformed will say that the player is leading and the puck is chasing the player.

That's the problem with watching two lines on a screen and not knowing what those two lines actually represent. One came come to some really silly conclusions like the hockey puck is chasing the hockey player when it is actually the other way around.  

Actually, that is the problem with not being able to see outside the mainstream narrative.

Anyway, this is a VERY POOR analogy, since a puck cannot think.

And you are still saying the same thing as I am but not realizing it. I have yet to see comments from the CBs that the markets have not already factored in. Sometimes the CBs try to change the narrative to influence the market in a different direction, but the market does not bite. All you have to do is follow the headlines to see this, over and over and over again.

Anyway, I will continue to present what I see. There are whole groups that see it the same way. People can do with it what they will.

smayer97 said

Actually, that is the problem with not being able to see outside the mainstream narrative.

Anyway, I will continue to present what I see. There are whole groups that see it the same way. People can do with it what they will.  

It is a bigger problem when one thinks one can see better by seeing outside the mainstream narrative, but get everthing wrong at the end just caused one wants to be different.
As I said many times, traders can adjust their expectation every sec as new data comes out, while CB only drops hints at various conference etc and only make official rate announcement 8 times a year. And given both uses the same economic data, it "may' appear CB follows the traders lead, but that is just not true.

SaverJunior said

Norman1 said

the central banks set the short term rates. Like overnight, 30 days, and 90 days. Rest is up to the market.

Central banks can make direct influence on longer term rates through quantitative easing (QE) or tigtening (QT).

They can. But, that's not what central banks use QE for.

QE is used when there isn't enough market demand for the treasury bills, bankers acceptances, commercial paper, and bonds at the appropriately low yields when the policy rate is low. So, the central bank will enter the market and offer to buy those at the low yields. That allows banks and businesses to issue those instruments and actually get funding at the low rates.

mordko said
Not sure how you came to the conclusion that “short term GICs are always better”. Better than what? Long term? In general longer term bonds and GICs carry more risk (e.g that interest rates will rise) and therefore provide more reward. But… Not always the case. Hard to predict the future. And right now we have even more uncertainty than normal.  

Short term better than Long-term.
Can you please give me an example from recent past where the long term rate is substantially higher for me to lock-in, say 5 years. I guess it should be like at least 2% higher.