A bond is a loan made by an investor to a government or company. When bond prices fall, their yields rise because investors can purchase the same future interest payments at a lower price. Rising yields can therefore indicate that investors expect higher interest rates or inflation.
One of the most immediate effects can be on borrowing and fixed-rate mortgages, and other loans are influenced by longer-term government bond yields. If yields remain elevated, people renewing a mortgage or arranging a new fixed-rate loan could face higher borrowing costs.
Higher rates can affect household budgets. Someone renewing a mortgage may need to reassess their monthly repayments, and higher rates can also affect car loans, personal loans and other forms of credit.
There is a positive side for savers. Banks compete for deposits and investments, meaning higher market yields can encourage them to offer more attractive rates on guaranteed investment certificates and other savings products. People with cash savings may therefore be able to earn more interest without taking significant investment risk.
What This Means for Individuals, Investors and Small Businesses
Individuals approaching a mortgage renewal should review their finances early and consider how different interest rates would affect cash flow. Savers may wish to compare GIC rates and other low-risk options rather than leaving large cash balances earning little interest.
Investors should remember that rising yields can affect existing bond investments. Small business owners may face higher financing costs if they rely on loans. Higher rates should be incorporated into cash-flow forecasts and future investment decisions.
Tax And Record-Keeping Considerations
Interest earned from investments is generally taxable, so you should keep records of interest income for tax reporting. Investors should also maintain records of investment purchases, sales, interest and other income.
Practical steps to discuss with your accountant
Consider asking your accountant how higher interest income impacts your tax position. Borrowers can also discuss mortgage interest costs, business borrowing and cash-flow planning with their accountant.
Rising bond yields may create challenges, but they can also provide opportunities. Understanding both sides can help Canadians make better-informed financial decisions as interest rates and inflation expectations continue to change.
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Disclaimer:The information in this article is general in nature and does not constitute financial, investment, taxation, legal or accounting advice. Readers should obtain professional advice relevant to their individual circumstances before acting on any information contained in this publication.
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