Bond yields impact on policy rate and GICs | GIC discussions | Discussion forum

AllanB said
Gic rates keep creeping up but bond yields have softened a bit. How do the three impact each other. For example, June 1 and next settings BoC expected to raise overnight rate at least half a percent each time while 2, 5 & 10yr bond yields fall a quarter percent will Gics rates continue their march up. Maybe the diversion is signalling stress in commercial markets or a pullback in rates. Why don't central banks take advantage of the flight to safety and unload their QE bonds onto real investors.  

GICs will increase when BoC increases. The bond yields decrease slightly because the higher rate from BoC means future bond releases will be higher and current bond holders sell. Selling lowers yield. If rates keep climbing the current bonds can’t easily be sold without an increasing loss.

Bank of Canada doesn't need to do anything with the bonds purchased for QE. It can just let the bonds mature.

There is currently about $417 billion of Government of Canada bonds on its balance sheet from QE and previous purchases.

$210 billion of the bonds will mature in 3 years or less. Another $77 billion will mature in 5 to 10 years. That's $288 billion of the $417 - $77 = $340 billion of bonds purchased for QE.

AllanB said

Boc lets bonds mature gets money back it bought bonds with, then how does government finance its deficit some increased revenue but rest who gonna buy their bonds...

 

Pension plans, institutional investors and the retail public all buy bonds. The BoC buying or selling bonds has little to do with the government of Canada selling bonds as it wishes/needs to finance its deficit.

The BoC buys or sells bonds as a means to increase (QE) or decrease money supply (QT) in the banking system. It also influences bond yields through supply/demand principles (Econ 101).

AllanB said
It's a wash then no money added to debt from QE? They have a difficult time tightening or withdrawing from QE why is that?  

The BoC has its own balance sheet. It is not sovereign debt on the gov'ts books. Go to https://www.bankofcanada.ca/rates/banking-and-financial-statistics/bank-of-canada-assets-and-liabilities-month-end-formerly-b1/ and click on various Assets and Liabilities legends to get graphical comparisons.

AllanB said “I believe traders are manipulating the bond market to lower yields to increase speculation. Don't be intimidated let them lose.  “

Where is this nonsense come from… sigh

AltaRed said
To answer the OP more directly, as near term interest rates rise, the bond yield curve tends to flatten out on the premise that higher rates today will tame inflation enough that long term bond holders don't need as high a premium for the risk undertaken.

There is only a fairly loose correlation between 5 year bond yields and 5 year GIC yields. GIC rates tend to correlate more directly with demand for mortgage money and institutions have to compete with each other to secure the funds for those loans.

My view of the current situation whereby 3, 4 and 5 year GIC rates are about the same is a suggestion that the mortgagor today is looking to lock in for 3 years on the hope that interest rates will be back down in 2-3 years and they can return to variable rates. They will only go 5 years if they think rates will continue to rise long term.

There has been a surge in home buyers looking for money today before rates get worse and that is creating the competition in institutions trying to attract money. That will likely come to an abrupt halt once mortgagors feel they are in the clear from further BoC rate rises. Until we know what BoC has to do (and will do), it is unclear to me how much further 5 year GIC rates will continue to climb.  

I’m expecting 5yr GICs to start moving up soon, laggard.

Look like a few pros posting on this thread, in your opinions how are Canadian or American govt bonds competing right now against Corporate bonds, GICs etc?

Yes but you can sell at anytime and if rates drop is it not out of the realm to make 15 or 20% in a year on long term govt bonds?

savemoresaveoften said

Govt bonds dont compete against corp bonds at all. Corp bonds always price at a spread over govt bonds, that spread reflects the credit quality of the underlying corporation.  

This is true, however, if government borrow too much money, it will reduce amount of funding available to other entities. This can be reflected by increasing yield on all bonds.