Financial Post / Rechtshaffen: Interest rates are still rising, but investors should start preparing for when they come back down


Variable rates will likely be a benefit once again in the midterm

The Bank of Canada over the past 30 years has had six periods of interest-rate hikes, ranging from 1.25 to 3.2 percentage points, before this most recent set in 2022.

The one thing they all had in common was that it didn’t take long for each of them to be followed by a period of declining interest rates, ranging from 1.25 to 5.125 percentage points.

One logical reason for this is that rate rises are meant to slow down the economy, and rate declines are meant to boost the economy. There is a general view that the increases typically start too late, and so rates are still rising after the economy is already slowing. Once they really start to take effect, the impact can be too much, and the central bank has to do a quick about-face.

Let’s do a quick review of the six rises and falls since 1994.

In October 1994, the Bank of Canada’s overnight rate was 4.94 per cent. Over the next four months, it rose significantly to 8.125 per cent — a rise of 3.2 percentage points. Over the following nine months, it declined to 5.94 per cent, and one year later it was sitting at three per cent. This was a large rise and fall historically, but it outlines how quickly rates can rise and how steep the ultimate decline can be.

The next period of rate adjustments saw the overnight rate rise to 5.75 per cent from three per cent over a 15-month period in 1997 and 1998. The subsequent decline wasn’t as steep, but it did drop over the following nine months to 4.5 per cent in May 1999.

In October 1999, the rate was still 4.5 per cent, but then rose to 5.75 per cent by May 2000. One year later, it was back to 4.5 per cent and it was all the way down to two per cent by January 2002.

Over a 25-month period from March 2002 to April 2004, the rate went from two per cent to 3.25 per cent and back to two per cent.

During a relatively prosperous time, the rate rose to 4.5 per cent in July 2007 from 2.5 per cent in August 2005. But the financial crisis of 2008 started to rear its head, and rates fell first to three per cent by April 2008 and all the way to 0.25 per cent a year later.

More recently, the rate in June 2017 was at 0.5 per cent, rose to 1.75 per cent by October 2018, and then dropped to 0.25 per cent by March 2020 when COVID-19 began.

What does this mean for today? So far, we are 1.25 percentage points into an interest-rate-hiking cycle. Some think there are another one or two more points in front of us. Others think it will be less than that. What if the overnight rate goes from 0.25 per cent (where it was in February 2022) to 2.75 per cent? For many of us, that would be a bad thing because our borrowing costs would be meaningfully higher. However, if we were somewhat confident that rates would soon be heading down from there, would that ease our concerns?

History suggests this will happen. The six hiking cycles averaged 13 months in length. The current one is four months in. The six declining cycles began on average 5.7 months after the hikes stopped, but it happened within three months in three of the six scenarios. The average interest rate hike was 1.95 percentage points and the average decline was 2.85 percentage points.

History can be a guide, but certainly not a clear roadmap. If all we did was simply look at the averages here, it would suggest that we have another 0.7 percentage points of rate hikes, which would take another nine months to reach. Interest rates would then start to decline by September 2023 and eventually drop all the way back to 0.25 per cent (or more if it was possible).

Of course, each scenario is different, so things won’t simply follow these averages. The causes are different and the starting point on interest rates is different. That said, this cycle has been very repetitive over the past 30 years.

If I had to guess, I would expect the rate-hiking timeline will be shorter than 13 months, but that rates will move up by more than just 0.7 percentage points. I believe the start of the rate declines might happen sooner than September 2023. The implied policy curve for Canada currently suggests that rate hikes will peak in six months and then start to decline with the following year. This doesn’t mean that this is a fact, but it shows that even today, the implied policy rate is giving some indication of the same cycle we have seen several times before.

Another clue as to why the next cycle might look like the past is that even the Bank of Canada has said one of the reasons for increasing rates is so it will have some greater tools and leverage to help the economy by lowering rates if we go into a recession or something similar.

If that is the future, what does that mean for investors and borrowers?

Variable-rate borrowers will feel more pain in the near future, but it isn’t a one-way road. Variable rates will likely be a benefit once again in the midterm.

If you are looking at buying guaranteed investment certificates, annuities or bonds, it may still be a little early to lock in or invest, but there will likely be a sweet spot to do so later this year or in the first half of next year.

High inflation and higher interest rates seem like the obvious situation today, but this may shift in the not-too-distant future, so don’t go overboard with this investing thesis as it can turn on you. You want to be nimble.

The key message here is that we should not panic about runaway rate hikes. They will continue to rise, but it is also very likely that we will see rates fall shortly after the hikes stop. Maybe this rollover will happen by the end of this year or at some point in 2023, but being prepared for this scenario will allow for some investment opportunities and debt opportunities to be maximized.

Reproduced from Financial Post, July 12, 2022 .

Ted Rechtshaffen
Provided By:
Ted Rechtshaffen, MBA, CFP
President and CEO
(416) 733-3292 x 221

3 ways to benefit now from historically low interest rates



There are those who think that interest rates are going lower. They may be right. But this column is for those other folks.

The ones who feel that the only place for interest rates to go from here is up.

While many of us follow the prime rate that is tied to a variable rate mortgage (i.e. prime minus 0.5%), fewer of us follow the 10-year Government of Canada bond rate. This 10-year rate is now down to 1.28%, virtually the lowest rate in Canada’s history.

When any financial data appears to be at an extreme level, there is usually a rare financial opportunity associated with it. Here are three possible ways to take advantage of this rare situation.

Consider taking the cash instead of the pension – it could be worth $400,000+ more

If you are in a defined-benefit pension plan and getting close to retirement, make sure you review whether you are able to take your pension “in cash.” This isn’t something that everyone should do, but the historical low interest rates create a rare opportunity for your pension to be worth a lot of money.

We have seen several people at large quasi-governmental energy providers with pensions that are presently valued at $2 million with today’s low interest rates.

Let’s assume this pension is based on a 65-year-old male, with a 60% spousal survivor pension. What happens if rates go up? You might think that this person who worked and contributed to their pension for 40 years wouldn’t care about interest rates, but the impact would be sizable.

If mid-term interest rates went up 2%, this pension that is worth $2 million today would be worth $1,580,000, according to Toronto-based actuary Daniel Kahan.

So retiring today and taking the pension would provide over $400,000 in extra cash than if our pensioner retired when rates were 2% higher.

The message here is that if you are considering retirement with a pension, it is always worth knowing the commuted value of your pension. If you were ever considering taking the commuted value in cash, now is probably the time to do it.

Take the fixed-rate mortgage – it only costs about 0.5% more

The variable vs. fixed-rate discussion could go on forever. I know that, historically, variable-rate mortgages have done better for consumers than fixed. In my opinion, now is not one of those times.

If you shop for the best rates on either five-year fixed or variable mortgages today, you can usually find a gap of just 0.54%. For example, you might get as low as 2.05% on a variable-rate mortgage, and as low as 2.59% on a 5 year fixed.

A lot can change in five years, and by taking a variable rate, you are getting only a 0.54% premium for taking this risk.

To oversimplify things, if short-term rates don’t change for a full year, but went up just 0.75% (to a rate that is still near historic lows) and then kept that rate for four years, you would still be slightly better off financially with a fixed rate.

Keep in mind that as recently as 2007, the bank prime rate was 3.65% higher than it is today. It took just 18 months for the rate to drop 4.25% from 2007 to 2009. If you are in a variable-rate mortgage, you don’t want to even think about a 4.25% increase in 18 months. At a real “cost” today of just 0.54%, I think paying this extra 0.54% for the ability to lock in a fantastic rate for five years may be a significant financial win today.

Consider buying an ETF that shorts long-term bonds

In 2014, the iShares 20+ Year Treasury Bond was up 28%. It was up another 8% in January. This isn’t a normal return for a bond ETF. The reason it did exceptionally well is that long-term bond yields had dropped so low.

When a bond investment does that well, you have to be a little wary of what will happen next.

If one believes that the U.S. long-term interest rates are truly near the bottom today, one of the best investments would be something like the ProShares Short 20+ Year Treasury ETF (symbol is TBF). This ETF essentially works the opposite of the iShares ETF. The ProShares Short ETF was down roughly 25% in 2014.

Of some interest, this ETF can also be used as something of a hedge against the stock market. Certainly one of the biggest fears of the stock market is a return to rising interest rates. In that event, this ETF will perform very well at a time when the stock market is not.

We don’t know if we are truly at the bottom for long-term interest rates, but we do know that we are currently outside the long-term historical norms. Just as technology stocks in 1999 had valuations outside of long-term historical norms, and today’s oil price declines have now reached historically significant levels, today’s long-term interest rates likely represent a rare opportunity for significant wealth creation – if you have the guts to move in the opposite direction of the herd.
Reproduced from the National Post newspaper article 4th February 2015.

Ted Rechtshaffen
Written By:
Ted Rechtshaffen, MBA, CFP
President and CEO
(416) 733-3292 x 221

Low rates equal solid CDN Real Estate


These days it’s even harder to ‘see the forest for the trees…’ as we’re bombarded with news, advertisements, new TV series, text messages and other information. In this article we look at a series of pointers on the Canadian economy, which will affect our daily lives for years to come.

We start with our government and no better place than bank governor Stephen Poloz who delivered a speech last week suggesting our interest rates are likely to remain low for the next decade, yes decade.

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