Interest Rates – what is happening, why it is happening, and what we are doing about it


In 2022 we saw a steep global rise in interest rates at a pace few could have ever expected. Even into 2023, many central banks are still indicating they are not finished and more needs to be done to bring stubbornly high inflation back to their 2% target.

Heading into the new year many expected interest rates to continue to climb for the first half of the year and then pause or even decline in the latter half. While the Bank of Canada recently made the decision to pause further interest rate increases, the US Federal Reserve has continued to push ahead, repeatedly noting there is more to do and the increases thus far have not had the needed impact.

Interest rates have continued to be a significant driver of uncertainty for investors so we wanted to provide an update on what we are doing to manage this volatility and address some of the important questions you may have had yourself.

It’s worth noting where interest rates and inflation stand today.


  • Headline inflation in Canada cooled to 5.9% January, down from a peak of 8.1% in the Summer.
  • US headline inflation peaked at 9.1% in June, but presently stands at 6.4%.
  • Inflation remains elevated globally which has had significant impacts on our everyday spending and although it continues to cool, it will not be in a straight line.

Interest Rates

  • The Bank of Canada has paused interest rates at 4.50%, rising from 0.25% in 2021.
  • The US Fed interest rate stands at 4.75%, also up from 0.25% in 2021.

What caused inflation to get so high?

Too much money chasing too few goods and services is ultimately what drives inflation. Government stimulus during the pandemic was a life saver for many households and companies but the impact this stimulus had on the economy was not intended to be this long. Consumers still have excess savings and, although many of the pandemic driven supply chain issues have been resolved, consumers continue to spend. This accompanied by the strong job market and associated rise in wages has added fuel to an already hot economy.

What are central banks trying to accomplish with higher interest rates?

Higher interest rates are an attempt to slow consumer and business activity across the economy – and, by extension, inflation – by making debt-based spending more expensive. Big ticket items, like homes and cars, begin to cost more because buyers are paying higher interest rates for their mortgage and other loans.

It’s also worth noting that interest rate increases take time to work through the economy. While those with a variable rate mortgage may feel the impact immediately, other forms of spending like business expenses take longer to feel the impact.

Why is Canada pausing interest rate increases while the US continues to climb higher?

There is a variety of reasons why this may be happening, but a significant factor is how our two economies are structured and what household consumer debt looks like.

Canadians carry much more debt than the average US consumer. This is especially true as it relates to mortgage debt. Many Canadians carry variable rate mortgages that are subject to 5-year renewals. This differs from many US homeowners who, after the 2008-09 financial crisis, shifted away from variable rates and towards fixed rate options. Prior to 2008, 40% of US households had variable mortgages, while only 10% have variable mortgages today. Our neighbors to the south also benefit from 30-year terms, meaning they are less likely to be faced with a renewal in the near term at today’s higher rates.

These are notable differences and mean that Canadians have felt the brunt of increasing interest rates much more quickly than Americans. This also means that as interest rates have climbed in the US, the intended impact of driving down spending has not happened as quickly when compared to past periods of increasing interest rates.

Will higher interest rates drive us into a recession?

If we do enter a recession in the near term this will likely be the most foreseen recession in history. Every day we are inundated with news that a recession is coming but no one can agree when. Recently, the Wall Street Journal published an article titled “Why the Recession Is Always Six Months Away”. This is largely a play on many economists constantly having to revise their expectations as a recession fails to materialize.

Employment remains very strong in Canada and in the US and wages continue to grow. This, coupled with continued consumer spending, is not a characteristic you would expect heading into a recession.

  • Canada added 150,000 jobs in January compared to a Reuters survey estimating 15,000.
  • In the same period, the US added 517,000 jobs compared to an expected 185,000.

The below chart looks back at past recessions and how interest rates have developed over time.

Also of key concern is the inverted yield curve. While the details of this phenomenon are not important in this forum, what’s important is this signifies that investors expect interest rates to rise in the near term but that those hikes will ultimately damage the economy, forcing rates back down over time.

  • Investors have used this as an indicator for a pending recession. Typically, an inverted yield curve puts a recession 11 to 14 months away from that point on. This would have us see a recession in October at the earliest.

How severe of a recession will we see?

This is the million-dollar question driving fierce debate among economists, politicians, and investors.

Most are betting on a “soft-landing” characterized by a gradual reduction in inflation and a slowing but still strong economy. Despite this, the longer interest rates remain elevated and the higher they get, the greater risk of a policy error by central banks resulting in a more severe and prolonged recession.

What is TriDelta doing?

No one knows for sure what the next several months will bring and we continue to be active within our portfolios with a focus on ensuring we are able to preserve capital and look to be opportunistic when others let emotion drive decisions.

  • Both of our actively managed equity funds continue to have a higher allocation to cash than historic norms.
    • This tactical exposure to cash allows us to take advantage of opportunities in the market and benefit from a greater income yield with many money market funds yielding almost 5%.
  • We manage volatility using options contracts which help to limit near term downside in the funds. These contracts allow us to protect portfolios on the downside while still allowing for upside if markets swing to the positive.
  • Just as in 2022, our focus is on companies with strong and stable cash flows, tenured management teams, and those often paying a healthy dividend.
  • Bonds had their worst year on record in 2022 and have become much more attractive in recent months.

  • As the interest rate dynamic has changed so too have the expectations around the stock market. Rising income yields for bonds have added to the volatility seen in stocks as investors weigh the perceived safety in greater income yields from bonds relative to the riskier stocks.
  • Interest rates are likely to remain higher for longer and unlikely to get near 2021 levels anytime soon. This changing dynamic will play a significant role moving forward and we stress the need for actively managed portfolios to work through this.
  • In our year end commentary, we spoke to the disappointing returns investors in “balanced portfolios” saw in 2022. These largely passive stock/bond only portfolios experienced much more downside than investors anticipated and, today, are providing income yields often worse than holding money market funds.

  • Alternative investments were a top performing asset class in 2022 and helped to dampen volatility. Our clients benefited from this added diversification away from strictly stock and bond portfolios.

Investors are keenly aware of inflation and have looked for any signs of easing inflation as a likely positive for the market as a whole. On the other side, any sign of a strengthening economy has actually been a negative as investors see this as evidence inflation is not falling and will therefore lead to higher interest rates. We have looked closely at all our portfolios and continue to be confident in our ability to protect on the downside and take an unemotional view of the markets to see opportunity where others may see risk.

The uncertainty we saw in 2022 and continue to see moving forward will keep many investors fearful of the future. We remind ourselves regularly that, despite this uncertainty, risk is lowest when price is lowest and coming off a year where stocks had their worst year since 2008 and bonds had their worst year ever, there are decisions we can make today which will have positive long-term value for our clients.


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.

Read More