To be mercenary about the demise of Silicon Valley Bank, it’s the break people buying a home or renewing a mortgage have been waiting for.
The global financial system has been shaken by the failure of SVB, which happened when it couldn’t satisfy demand from depositors to withdraw their money. For the first time since the 2008-09 crisis, there is real concern about the financial strength of some banks. Quick aside: Right now, I’m spending zero minutes worrying about Canadian banks.
The failure of SVB is big, though. It makes people nervous in ways that can ripple through the economy, choking growth in extreme cases and killing jobs. For now, fear is manifesting itself through a rush of money into bonds issued by governments. Bond prices soared Monday, which means the interest rate on bonds fell. If you’re a borrower, this is the best news in ages.
The cost of fixed-rate mortgages is heavily influenced by interest rates in the bond market. From 3.6 per cent a week ago, the yield on the five-year Government of Canada bond had plunged to roughly 2.9 per cent as of Monday afternoon.
Bond yields chugged higher through February and early March on concerns that sticky inflation would require more central bank interest rates hikes. Now, there’s fear of economic instability that would require lower rates as soon as this spring or summer.
Explainer: What happened to Silicon Valley Bank, and what its collapse means for banks and investors
You can’t bank on this shift in thinking, though. If the SVB collapse is contained and steps taken to strengthen shaky banks, then today’s pessimism may blow over. But what we’ve seen this week is dramatic enough to demand some attention from both borrowers and savers.
It’s too soon for lenders to reflect the decline in bond yields in fixed mortgage rates. But unless inflation flares up, we can now see a path to lower rates for mortgages in the months ahead. Lock in a rate with your lender if you’re buying a home or renewing a mortgage, but keep an eye out for rate cuts.
People with variable-rate mortgages would benefit if financial markets are right in projecting a quicker start to rate-cutting by the Bank of Canada. Until just now, the expectation was that the central bank would start reducing the overnight rate by late this year at the soonest and quite possibly early in 2024.
Cuts in the overnight rate lighten the load on variable-rate mortgages, as well as home equity lines of credit, unsecured credit lines and floating-rate loans. The overnight rate went up eight times in the past year, adding hundreds of dollars in extra borrowing costs for some households. As of right now, it looks like these households have seen the worst.
Savers, the phrase “as good as it gets” comes to mind in summarizing today’s rates on savings accounts, guaranteed investment certificates and high-rate savings account mutual funds and exchange-traded funds.
If you can spot a 5-per-cent return on a GIC and are fine with locking up your money, don’t delay. Rates on savings accounts and high-rate accounts should hold up better, given that they take their cue from the Bank of Canada’s overnight rate.
The collapse of SVB reminds us of at least theoretical risk of saving money with a bank. Canada Deposit Insurance Corp., a federal Crown corporation, protects eligible deposits in savings accounts and GICs for up to $100,000 in combined principal and interest. Confirm your bank’s membership in CDIC by checking this directory. Credit unions have their own provincial deposit insurance plans.
Investors holding bonds and bond funds will see the quickest return from the change in thinking about rates and inflation. All the money flowing into bonds pushes up prices, a welcome shift after last year’s sharp losses in the bond market.
It’s not unreasonable to expect the stock markets to react negatively to the fall of SVB and its aftermath. If that happens, bonds might once again fulfill their mission as a life jacket for your investment portfolio.
PERSONAL FINANCE COLUMNIST
The Globe and Mail, March 13, 2023