The banks have had a long run of strong profits but the good times are about to become a little less so, according to Ed Clark, chief executive of Toronto-Dominion Bank.
Europe remains in a shambles, the U.S. still hasn’t recovered, while in Canada strong tailwinds such as the housing market have turned into headwinds. But the real challenge, “the underlying issue” is what’s going to happen to interest rates, Mr. Clark told RBC Capital Markets’ annual bank CEO conference in Toronto on Tuesday.
The big story in economics is the recent rise in interest rates. In just the past several weeks, as talk has grown about reducing the pace of bond purchases via quantitative easing, yields on the US 10-year have surged past 2.5%. Very recently they were barely above 1.5%.
Anyone who has been following global financial markets over the past month or so will have easily flagged the sell-off in the U.S. Treasury market as a major event that has been felt around the world. Even more important than the price action in Treasuries itself, though, is how volatility in the market has risen. The chart below shows the percentage increase in both Treasury yields and volatility of Treasury yields since the beginning of May, when the big sell-off in the bond market began. Since May 2, yields have risen 34%, while volatility is up 64%.
By Timothy Strauts
In the past decade investors have embraced international-stock investing, but many of those same people still own all their fixed income in U.S. bonds. When interest rates were higher you did not need to take on the additional risk of international investing. But today, with ultra-low interest rates and concerns about the credit quality of the U.S. government and corporations, it may make sense to look to emerging markets for new opportunities.
Cullen Roche submits: Wednesday’s MBA mortgage applications data highlights another glaring error in the efficacy of QE2. While the Fed loves to point to rising equity prices (while denying blame for commodities) they appear to conveniently ignore the consumer’s largest asset – housing.
David Hunkar submits: The Shanghai SE Composite Index is down 17.71% Year-To-Date (YTD) and is flirting with bear market territory. While many of the Chinese investors are afraid of the market now, some see this plunge as a good time to enter the market. The optimists reason that it is not worth keeping money in banks due to the low interest rates and investments in real estate are not wise either since prices have skyrocketed.