Interest rates are rising. At the same moment most people will tell you they don't see interest rates rising any time in the near future, rates have actually been on the rise since early May.
What does this mean to you?
And what does it mean for the broader economy and all of the borrowers the minister of finance and the former governor of the Bank of Canada have been warning us about for the last two years?
First, I should explain what I mean by rate rising, since the last interest rate announcement by the Bank of Canada said they would keep interest rates where they are, with no increase in sight.
That announcement refers to the Bank of Canada's target rate for overnight lending between financial institutions, which influences rates throughout the economy.
What affects you and other consumers, though, are mortgage and lending rates set by the banks, credit unions and finance companies.
In the case of mortgage rates, the banks access funds to loan in the bond market, which is governed by supply, demand and expectations about the future.
It is in this bond market where rates have risen quite steeply in the last six weeks, the mathematical result of a decline in bond prices.
U.S. government Treasury bond rates increased from a low of 1.6 per cent to recently hit 2.4 per cent. That's a big jump.
If you've been mortgage-shopping lately, you've seen an increase in Canadian mortgage rates, from five-year rates of 2.89 per cent to posted rates of 3.29 per cent.
Anyone shopping for a house would be wise to lock in their mortgage rate now, while they look. This is always good advice, but more critical now.
Consumers with variable-rate loans should recheck their ability to handle higher interest rates and higher payments, or consider locking in a rate now, which would unfortunately be higher than today's variable rate.
Rising rates are a byproduct of the strengthening economy, especially in the U.S.
Bond prices have been supported (and interest rates kept low) in the U.S. by massive bond purchases by the Federal Reserve in order to keep interest rates low, a process they've called quantitative easing, or QE.
In mid-June, Fed chairman Ben Bernanke signalled the gradual end to this program, due to reduced risk of the U.S. falling back into recession. Good news, right?
When rates or expectations rise, long-term, low coupon bonds fall the most. Shorter-term, high-coupon bonds fall less.
Bonds issued by corporations will often fall, but sometimes rise as credit risk diminishes in a strengthening economy.
It is this decrease in prices that make rising rates a caution for investors and not just for borrowers.
In 1994, rates rose significantly in the first half of the year, driving long-term bond prices down as much as eight per cent (although from high prices inflated by previously falling interest rates).
Investors can protect themselves by shortening the term on their bonds, or by holding their bonds and GICs to maturity.
If a person believes interest rates are going to rise very steeply, they may choose to hold some money in daily interest or 30-day deposits, to wait for better rates in the future.
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner, adviser and vice-president with National Bank Financial Wealth Management and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.