Look out, real estate and stocks: bond yields have jumped

ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.

The recent spike in Canadian interest rates is bad news for both housing prices and equity market performance.

The Government of Canada ten-year bond yield has climbed 105 basis points since the May 2 low of 1.67 per cent.

Historically, rising rates have a negative effect on housing prices because they push mortgage rates higher. Rising rates also stifle corporate lending and investment, which slow corporate profit growth and stock prices.

Since 1990, there have been 19 occasions when domestic interest rates have climbed 75 basis points or more over a six month period. The table below shows what happened to both housing and equity prices in the aftermath.

On average, housing prices fell 2.5 per cent in the 12 months following a jump in yields. The average return for the S&P/TSX Composite was 5.2 per cent.

The average equity performance is skewed a bit by the 1999 experience. The Nortel Networks-fueled market rallies after July (47 per cent) and October (33 per cent) were short-lived and, in hindsight, a mistake on the part of investors who contributed to them. If we take these numbers out of the table, the average twelve month return for equities following a 75 basis point rise in rates falls to 1.1 per cent.

The heavy influence of central banks in global bond markets means that we have to be careful about assuming that the recent rate increases will have the same effects as they did in 1990 or 1994. Then, the problem was inflation; now, it's central bank policy.

Nonetheless, higher rates are a significant headwind for both profits and home prices. In the new interest rate environment, nvestors and home owners will have to adjust their expectations downwards.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .