MORTGAGE RATES AFTER USA DOWNGRADE
On Friday, the previously unthinkable happened: The United States lost its AAA S&P debt rating for the first time in history.
This cut, while somewhat debatable, will likely panic some investors and some anticipate that it will spark knee-jerk selling of stocks and longer-term U.S. bonds today. Here is what it could mean for Canadians ….
Thumb-nail analysis: Once everything shakes out, analysts suggest that this U.S. rating cut will have more of a downside influence on Canadian interest rates than upside influence. Here are a few short term potential benefits:
Short Term Effects: US Bond prices will go down, Canadian fixed mortgage rates will go down.
Diminished Reserve Currency Status: Foreign governments will be less likely to hold U.S. dollars in reserve if America’s creditworthiness is in question. Barclays says this could boost U.S. interest rates by another 25 bps. Meanwhile, Canadian bonds (and the Loonie) could benefit long-term for the opposite reasons.
Blessing in Disguise: U.S. spending is simply unsustainable. The whole world knows it. China, America’s biggest creditor, is demanding the U.S. slash its “gigantic military expenditure and bloated social welfare costs.” U.S. yields could eventually fall if Congress uses this wake-up call to trim spending. Canada lost its AAA rating in 1993 but got it back nine years later after cutting programs and balancing its budget. Conservatives will certainly use this U.S. downgrade as justification to keep our own budget in check. That again should be good for Canadian interest rates.
On Friday, the previously unthinkable happened: The United States lost its AAA S&P debt rating for the first time in history.
This cut, while somewhat debatable, will likely panic some investors and some anticipate that it will spark knee-jerk selling of stocks and longer-term U.S. bonds today. Here is what it could mean for Canadians ….
Thumb-nail analysis: Once everything shakes out, analysts suggest that this U.S. rating cut will have more of a downside influence on Canadian interest rates than upside influence. Here are a few short term potential benefits:
Short Term Effects: US Bond prices will go down, Canadian fixed mortgage rates will go down.
Diminished Reserve Currency Status: Foreign governments will be less likely to hold U.S. dollars in reserve if America’s creditworthiness is in question. Barclays says this could boost U.S. interest rates by another 25 bps. Meanwhile, Canadian bonds (and the Loonie) could benefit long-term for the opposite reasons.
Blessing in Disguise: U.S. spending is simply unsustainable. The whole world knows it. China, America’s biggest creditor, is demanding the U.S. slash its “gigantic military expenditure and bloated social welfare costs.” U.S. yields could eventually fall if Congress uses this wake-up call to trim spending. Canada lost its AAA rating in 1993 but got it back nine years later after cutting programs and balancing its budget. Conservatives will certainly use this U.S. downgrade as justification to keep our own budget in check. That again should be good for Canadian interest rates.
Bottom-line for Canadian Mortgage Rates: The above implications all seem to favor variable rates over the next five years. Canada’s economic ship will likely be anchored by a weakening U.S. economy, lessening the upside risk for our own prime rate.
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