Bond market selloff: What to know for your portfolio, rate hikes, recession odds

Surging bond yields are reflecting longer-term expectations for elevated interest rates in financial markets, experts say. Here's what that means for your portfolio.

A selloff in global bond markets could have major implications for Canadian households and investors as experts say financial markets are readjusting their long-term expectations for interest rates.

Bond markets around the world surged earlier in the week, including yields on the benchmark 10-year U.S. Treasury bond, which hit a 16-year high. The S&P 500, meanwhile, sank to its lowest level in four months on Tuesday before stabilizing somewhat on Wednesday.

A similar story is playing out in Canada, with a faltering TSX matched by 16-year highs on closely watched bonds such as the five-year Government of Canada yield.

Stocks have generally struggled since the summer under the weight of soaring Treasury yields in the bond market. High yields undercut stock prices by pulling investment dollars away from stocks and into bonds. They also crimp corporate profits by making borrowing more expensive.

Bond yields help to inform borrowing rates on a number of key lending products in Canada such as mortgages and car loans. They have a close but indirect relationship with the Bank of Canada’s benchmark interest rate, and can rise and fall based on the central bank’s movements or signals for future policy directions.

Robert Kavcic, senior economist at BMO, tells Global News that one of the reasons bond yields are reaching decade-highs is an acceptance in financial markets that central bank policy rates around the world will stay higher for longer.

Annual inflation has cooled from the 40-plus-year highs seen in 2022, but remained double the Bank of Canada’s two per cent target in August. Kavcic says that with inflationary pressures sticking around, global financial markets have slashed expectations for interest rate cuts in the near future.

After already hiking its main interest rate to the highest level since 2001, the U.S. Federal Reserve has indicated it may keep rates higher next year than it had earlier expected. While the Bank of Canada has said that its future rate moves are data dependent, the central bank’s governing council was careful not to communicate hints of rate cuts in its latest decision last month.