Of Bonds, Mortgages & Pensions

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As a mortgage broker I am always observing and monitoring the Government of Canada 5 year bond yield to look for cues about where fixed rate mortgages are heading. The price of fixed rate mortgages has a direct positive relation with Government of Canada bond yields so that when the yield goes up interest rates move up.

In my industry we tend to get quite excited when bond yields lower because it triggers lower interest rates. As anybody will tell you the last 36 months have offered the lowest mortgage rates ever. This of course is great if you are borrowing money but we shouldn’t forget the flip side of the equation and the negative effects of a low bond yield.

In his book The Ascent of Money Niall Furguson writes about bonds and their importance to our wealth. He explains that in the developed world a rising share of wealth is held in the form of private pension funds and other savings institutions that are required to hold a high proportion of their assets in the form of government bonds. In 2007 a survey of pension funds in eleven major economies revealed that bonds accounted for more than a quarter of their assets. With every passing year, the proportion of the population living off the income from such funds goes up as our population gets older and older.

So while there is short term gain for anyone borrowing mortgage money to buy a home today we shouldn’t look at the low rates as such a positive for society as a whole. With our quickly aging society and suppressed bond yields which erode our senior’s wealth we must be mindful of what we wish for.

P.S. Niall’s book was made into a PBS television series. I’ve attached episode one for your viewing pleasure.

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