The happy times of cheap money are drawing to a close as the U.S. Federal Reserve finds it increasingly difficult to justify keeping its key rate near zero. Brian Carney, vice president at Canso Investment Counsel, told Financial Pipeline that his could mean that Canadian consumers and companies will also find that borrowing is more expensive.
BC:The reality is that in the marketplace, the Fed and the Bank of Canada only control one interest rate, and that’s the overnight rate. The actual bond market, people who trade securities, control where interest rates are, out the yield curve. And out the yield curve impacts where individuals borrow. It impacts where corporations borrow. And interest rates both in Canada and the U.S. further out the yield curve have started to creep a little bit higher in 2015. So in the U.S., the U.S. Treasury borrows 30-year money at about three per cent and in Canada, today the Canadian government borrows money at about 2.3 per cent. So one of the things which we note is that there’s a huge disconnect when the Canadian government borrows money at substantially lower rates than the U.S. Treasury. So we think if nothing else happens, even if the Fed doesn’t raise rates, we think the positive economic situation in the U.S. and the somewhat negative economic situation in Canada warrants that Canadian interest rates move higher. We think they can at least go to parity with the U.S. and quite frankly, we think they should be higher than the U.S.