# Interest rate rise will effect which sector the most in a neg way or positive



## 1980z28 (Mar 4, 2010)

would REITs be on the neg side


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## HaroldCrump (Jun 10, 2009)

What interest rate rise?
Where do you see interest rates rise?

Germany issued 10 yr. Bunds yesterday for less than 1% for the first time ever in history.
Thus far, no country ever had 10 year bonds at less than 1% yield.

US 10, 20, and 30 year yields have been falling for several weeks now.


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## HaroldCrump (Jun 10, 2009)

US 10 yr. chart










US 30 yr. chart


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## Guban (Jul 5, 2011)

IF there is an increase, bond values will get hurt badly in the short term. Also housing prices will be hurt too. I can't believe the values for the homes sold in the area, and have to think that much of it must be the cheap money that is presently available.


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## lonewolf (Jun 12, 2012)

higher interest rates positive for annuities. (unless there is a higher rate of default)


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## Just a Guy (Mar 27, 2012)

Higher interest rates will kill the real estate market. Look at the USA in 2008 after they stopped allowing refinancing and had to pay the balloon interest payments.


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## sags (May 15, 2010)

As per what Harold says......

I am wondering why there is all the talk about higher interest rates.

I guess the theory is without the Fed buying 85 Billion a month in debt, there will be more debt offered than the buyers can digest, hence the higher interest rates.

An interesting article I read today about subprime auto lenders in the US. They receive their capital by selling subprime loan portfolios to hedge funds and corporations like Apple and Google.

The hedge funds are starting to back out of the business, as they view the risk of defaults rising. 

The article focused on Santander Consumer US.........who are supposed to buy Carfinco......the Canadian subprime auto lender.

Santander has been called up on the carpet by US regulators regarding the quality of the loan portfolios they have been selling.

It will be interesting to see if that deal goes through to completion now that the subprime lending scenario is slowly changing.


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## RBull (Jan 20, 2013)

Not sure if you meant your statement this way but Carfinco isn't the only Canadian subprime lender. It's estimated 33-40% of all car loans are sub prime in Canada.

I also read something several days and from what I recall these companies viewed these loans as less risky compared to sub prime houses, as they are smaller amounts and much more liquid. However I agree the direction with hedge funds doesn't send a good signal.


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## HaroldCrump (Jun 10, 2009)

sags said:


> I am wondering why there is all the talk about higher interest rates.


This is classic jawboning.
They do this every time they want to unwind the current version of QE.
There were similar discussions when QE-1 was unwound, when QE-II was unwound etc.

The US Fed is also cutting a break to the EU, because they are in far worse situation than the US.
Part of this is political, too.
The US does not want EU to go back into the bosom of Russia...so they are trying to prop them up by taking a hit this time on interest rates.
That is, the US is allowing their currency to become stronger temporarily while the ECB puts its own Q/E program in place and ramps up its bond buying.

In all the last 3 versions of Q/E (incl. Twist), they unwound it, then paused for a few months, before coming up with a new & improved flavor of QE.


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## Butters (Apr 20, 2012)

What about the positive guys?

I hear the lifeco's could benefit from rising rates

Any others?


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## Just a Guy (Mar 27, 2012)

If the real estate market and the stock market tumble, the people who benefit from rising interest will be far outnumbered by those who will be in major problems...I'm pretty positive about that.


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## birdman (Feb 12, 2013)

Banks profits will increase significantly as there financial margin will increase. The margin is the largest contributer to income and I believe have decreased signicantly over the past years.


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## leslie (May 25, 2009)

All depends on whether you are talking about the rates of 3-mo Tbills or 10-yr Treasuries. It all depends on whether the economy is getting stronger at the same time. It all depends on whether inflation is picking up.


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## sags (May 15, 2010)

RBull said:


> Not sure if you meant your statement this way but Carfinco isn't the only Canadian subprime lender. It's estimated 33-40% of all car loans are sub prime in Canada.
> 
> I also read something several days and from what I recall these companies viewed these loans as less risky compared to sub prime houses, as they are smaller amounts and much more liquid. However I agree the direction with hedge funds doesn't send a good signal.


Absolutely.

There are lots of subprime auto lenders these days.

If it is a sign of the times though............I don't think it is a good one.


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## birdman (Feb 12, 2013)

I'm talking about rates in general but particularly at the short end (prime, 90 bills). However, increased rates in the long end only will also benefit bank earnings.


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## sags (May 15, 2010)

There would be some positives for higher interest rates, but given the personal debt levels, I think the impact would be mostly negative.

It is pretty tough to see how the weak Canadian economy merits interest rate hikes.


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## HaroldCrump (Jun 10, 2009)

These benchmark interest rates such as 30 day, 10 yr., 20 yr., 30 yr. benchmarks is they are not sending key economic signals any more.
The yield curve used to be one of the most reliable economic indicators.
So many aspects of economics, global finance, and govt. policy used to be derived based on these key interest rates and the shape of the yield curve.

However, since the beginning of financial repression in 2009 and later, all these key signals have been rendered inaccurate and misleading by the various major central banks, led of course by the US Fed & Treasury.

Someone above referred to the 30 day rate.
That rate was manipulated via Twist, when the Treasury sold massive amounts of short term notes and the Fed bought back mid term and long term bonds.

Q/E, LSAP, etc. have suppressed key interest rates and made the all-important price signals misleading.
Benchmark rates do not reflect economic risk and inflation threats any more.

To make matters worse, there is rampant manipulation of LIBOR by major money center banks, under full knowledge and blessing of the same central banks.


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## RBull (Jan 20, 2013)

sags said:


> Absolutely.
> 
> There are lots of subprime auto lenders these days.
> 
> If it is a sign of the times though............I don't think it is a good one.


I'm with you on that one. Increasingly the economy seems like a house of cards.


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## lonewolf (Jun 12, 2012)

sags said:


> There would be some positives for higher interest rates, but given the personal debt levels, I think the impact would be mostly negative.
> 
> It is pretty tough to see how the weak Canadian economy merits interest rate hikes.


 If lenders lose confidence in the ability of the borrower to pay back they will demand higher interest rates for the higher risk.


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## Cal (Jun 17, 2009)

Insurers would benefit, some banks too, would be a downer for RE, some reits (not all have to do with real estate), and some gas/pipelines.


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## HaroldCrump (Jun 10, 2009)

OMG interest rates are going up...just look at this latest GIC rate from Scotiabank.
...and it is a _special _rate...


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## humble_pie (Jun 7, 2009)

HC you're the econ guru around here ...

will dividend yields crash down to meet interest rates?
or will interest rates rise to meet divvy yield levels?


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## Cal (Jun 17, 2009)

^ I don't think either will happen....


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## Siwash (Sep 1, 2013)

HaroldCrump said:


> What interest rate rise?
> Where do you see interest rates rise?
> 
> Germany issued 10 yr. Bunds yesterday for less than 1% for the first time ever in history.
> ...


We live next to the strongest economy in the world... we don't live in Germany... Europe is dead, right now... The US will raise rates. Canada will feel this. 

Next two year will see rates rises... I think those exposed to big mortgages/debt will be hurt badly. Housing will be affected negatively (or positively depending on your position!) in T.O., Vancity

my 2 cents


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## carverman (Nov 8, 2010)

"we live next to the "strongest economy in the world"???

Doom and Gloom book sellers are making a killing with their books predicting the next 'market crash"..
http://fortune.com/2011/09/02/aftershock-finding-fortune-in-marketing-doom/

Hmmm?..did Chicken Little fall on his head again?


> In a nutshell, Aftershock argues that a succession of bubbles have set the country on the path to ruin. First came the dotcom bubble, then the housing bubble. Now Federal Reserve market “manipulation” and the “incredible irresponsibility and bad judgment of the public sector” — i.e. the U.S. government — make banana republic inflation levels inevitable starting in 2012. Their advice: Sell everything, and pile into gold and inflation-linked securities.



Chicken Little's cousin supports him.
http://www.theaureport.com/pub/na/harry-dents-formula-for-surviving-the-great-bust-ahead



> In the U.S., most people focus on government debt. Under George Bush, the national debt grew from $5 trillion (T) to $10T in 2000–2008. At the same time, the banking system, financial systems and shadow banking—in the private sector—created $22T in debt. That was the greatest debt bubble in history, and it occurred in developed countries all around the world. S*o we have this global debt crisis and this debt has to deleverage. Everybody is in too much debt—financial institutions, consumers, businesses and governments, with central banks propping them up and bailing them out. Obviously, this can't go on forever*.





> If the demographics weren't working against the Fed and the other central banks, it might be different. But they're fighting a battle they can't win because the baby boomers are working against them. How do you stimulate an economy when the largest part of its workforce, the aging baby boomers, wants to save and not spend, to pay down debt?


and Dan Arnold's book.."the great bust ahead"..


> Doomsayers may agree that the end is near, but they don't speak in one voice as to the reasons why. Peter D. Schiff, who wrote ``Crash Proof: How to Profit from the Coming Economic Collapse'' with John Downes, says the *decline of the U.S. economy is the reason for impending disaster. It is a ``house of cards'' that has ``deteriorated beyond the point of no return*.''


and Peter Schiffs book..crash still to come...
http://www.forbes.com/sites/marcpro...reign-bonds-and-how-to-fix-the-us-government/


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## HaroldCrump (Jun 10, 2009)

Siwash said:


> We live next to the strongest economy in the world... we don't live in Germany...


Some might argue that Germany is the strongest economy in the world.
Their bond yields right now are the absolute lowest in the world going back over 300 years...10 yr. rates below 1% have never been seen before by anyone alive today, not even during the Great Depression.
Their unemployment rate is much lower than the US, and their labor participation rate is very high...perhaps the highest in the G7.
I'd say most of the G7 countries would do murder to be more like Germany.



> The US will raise rates.


They could, of course.
The Fed is known to have done many stupid things before.
They cut rates when they shouldn't, and raise rates when they shouldn't.
They cut too late and too much, they raise too late and too fast.

Raising rates, even in 2015, will put the US economy at a _significant_ disadvantage relative to the rest of the developed world.
There is already a massive flight of capital to the US$.
Capital is fleeing from Japan, Europe, China, and emerging markets to the US.

Keep in mind that the US has tremendous excess capacity with labor participation rate at barely 60% and official U3 unemployment still at 6%.
They have no _need_ to raise rates.
Of course, that does not mean they will not.

I agree with your assessment that if the US raises rates - leading to a rise in bond yields - Canada will be negatively impacted.
Housing will probably correct, there will be flight of capital, oil & gold prices will fall further (gold is an inverse of the US$).
All of the above will hurt Canada significantly.

At the risk of sounding like a talking head on TV, I'd speculate that a significant rise in US rates/bond yields, can potentially throw Canada into a recession.
Our central bank will have to move very aggressively to raise Canadian bond yields to higher levels than the US (let's take that AAA credit rating for a spin, shall we?)
That will further exacerbate the recession.
However, there is no evidence that the present crop at the Bank of Canada (Poloz, Tim Lane, et al) care about that at all.
They would rather trash the CAD$ and see it at 60c. before they are done with it.


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## HaroldCrump (Jun 10, 2009)

humble_pie said:


> HC you're the econ guru around here ...
> will dividend yields crash down to meet interest rates?
> or will interest rates rise to meet divvy yield levels?


I wish there were an easy answer - it depends on how long corporations can leverage the low borrowing rates to doctor their dividend yields and EPSs.
It is a well known fact by now that since 2010, corporations have been borrowing at record low rates and distributing the proceeds either as increased dividends or reducing EPS via buybacks.

_*Stock Buybacks Surge as Companies Borrow for Share Repurchases*_

Note the date on the above article.

*The situation has become far more pronounced* since 2013.

By some measures, *corporate cash flows and profit margins are actually falling, while EPS is rising*.

There are other things going on too that temporarily and artificially create the perception of profitability, such as tax inversions (i.e. re-domiciling to a lower tax jurisdiction), labor arbitrage (i.e. TFWP, offshoring, etc.).

Falling dividend yields in the absence of organic growth is extremely dangerous and will lead to a classic stock market crash.
It simply cannot go on.

Rising bond yields, however bad they might seem, is perhaps a better outcome.
It may cause further slowdown, or even a recession lasting 3 - 4 quarters, while the economy adjusts, but I believe that is a better outcome.
Artificially low bond yields have rendered most common leading indicators, such as the yield curve, unreliable as economic bellwethers.

So, my preferred outcome would be for bond yields to rise, while payout ratios stay same or fall gradually.
Falling dividend yields, esp. in absence of organic growth, is a dangerous outcome.

But just because we wish for a particular outcome does not make it so.


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## CPA Candidate (Dec 15, 2013)

I'm so tired about people talking about rising interest rates when rates are actually falling. 10 yr CDN bond yields were 2.8% earlier in the year and now about 2.03%.

Good thing everyone sold their REITs and dividend stocks in 2013 to protect themselves.

We are going to look back five years from now when rates are still low and laugh about all of this endless chatter.


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## HaroldCrump (Jun 10, 2009)

CPA Candidate said:


> I'm so tired about people talking about rising interest rates when rates are actually falling. 10 yr CDN bond yields were 2.8% earlier in the year and now about 2.03%.
> Good thing everyone sold their REITs and dividend stocks in 2013 to protect themselves.


I refinanced my mortgage at 2.20% in 2012.
Financial repression is great...what's not to like ;o)


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## My Own Advisor (Sep 24, 2012)

HaroldCrump said:


> I refinanced my mortgage at 2.20% in 2012.
> Financial repression is great...what's not to like ;o)


WOW.

I only hope I can get that rate later next year HC!


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## HaroldCrump (Jun 10, 2009)

Did you guys look at the Fed minutes from yesterday afternoon?
The Fed is worried about the recent strength of the US$.
The minutes contained jawboning statements to play down the currency.

The original master of this strategy was our own Mark Carney.
Not Bernanke, but Carney...Yellen is simply taking a page out of his book.
He is now executing the same strategy at the Bank of England.

Poloz is to Carney what Hank Jr. is to Hank Sr. (fans of country music will know what I mean).

Yellen aint raising no stinkin' rates.
Wait till the Fed reshuffle in Jan, and then we can start a new thread about QE-4.


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## sags (May 15, 2010)

The Canadian economy is in the tank. I doubt we will see interest rate hikes in Canada.


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## HaroldCrump (Jun 10, 2009)

^ agreed. Private sector businesses are not spending any money/making any investments.
House prices may be at all time highs and the shopping malls may be full, but business investment is very weak.
I don't know who StatsCan is talking to when they publish those business confidence surveys, but most business partners, customers, and suppliers that we deal with in my organization are stagnating.


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## lonewolf (Jun 12, 2012)

HaroldCrump said:


> ^ agreed. Private sector businesses are not spending any money/making any investments.
> House prices may be at all time highs and the shopping malls may be full, but business investment is very weak.
> I don't know who StatsCan is talking to when they publish those business confidence surveys, but most business partners, customers, and suppliers that we deal with in my organization are stagnating.


 Harold your right, I do not see it changing for a while, Baby boomers are past peak spending. The trend of factories increasing production had to end with the boomers wanting to safe for retirement.


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## Cal (Jun 17, 2009)

http://www.theglobeandmail.com/glob...ate-hikes-lead-to-major-risk/article21820222/

Not exactly an equities article, however an interesting look nonetheless.


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## banjopete (Feb 4, 2014)

It would seem then that banks in Canada will continue to do good business with rates moving in either direction. As long as housing has insurance help outside of the banks they are happy to lend. Personal lending seems to occur with low scrutiny of rates for the average joe, the only question being am I approved so a rise will simply mean the cost is pushed onto the borrower. I imagine jane average goes to the bank and the banker says "yada yada yada, rates, yada yada, so it's going to be higher than average, yada yada, how does 20k at prime plus X sound" perfect just sign here, and here, and initial here. Good luck with your renos"

I can also see big business in debt consolidation loans, any rate under 19.99% looks pretty attractive when you're carrying CC debt with a bunch of department stores...


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## Pluto (Sep 12, 2013)

Cal said:


> http://www.theglobeandmail.com/glob...ate-hikes-lead-to-major-risk/article21820222/
> 
> Not exactly an equities article, however an interesting look nonetheless.


Good article. I agree with the article. If rates go up, the value of the income property goes down. Same thing applies to stocks.


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## Pluto (Sep 12, 2013)

HaroldCrump said:


> US 10 yr. chart
> 
> 
> 
> ...


Looking at Harolds charts, it is very interesting that in Sept 2014 there was a sharp rise in yields that peaked right near the time when stocks started to sell off, then yields declined along with stocks. Makes me consider/think that the Mid Sept peak yield was more than stocks can withstand. 

It could be that there is a threshold, say 2.5 on the 10 year, and maybe 3.3 on the 30 year, that many institutions have as a trigger to sell some stock. 

Anyway, there is a lot of talk that we are in a 20 year + secular bull market for stocks. Could be true. But we have to keep in mind that "secular" bull markets have bear markets in them.


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## lonewolf (Jun 12, 2012)

The world is swimming with debt. To pay to take on more debt when the world is swimming in debt I think is keeping interest rates low. When confidence dies in the ability of those to pay back debt the lenders will want higher interest rates for the creditors perceived risk.


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## namelessone (Sep 28, 2012)

Negatively:
Highly leveraged industries/businesses.
Long term bond.


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## supperfly17 (Apr 18, 2012)

Would lower oil prices have any effect on interest rates?


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## Just a Guy (Mar 27, 2012)

If you're in Russia, yes...otherwise, I'd expect it to delay any increase.


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## fraser (May 15, 2010)

Lower oil prices have a negative impact on currency. More than half of our GDP is made up of natural resources-which includes oil.

When the price of oil drops there is less demand for CAD dollar. At some point on that slide, the Gov't MAY decide to prop up the dollar by increasing interest rates. This increase attracts foreign money into the country, creates demand for CAD dollar, and it's value vis a vis other currencies increases.

Among other factors, this is what you are seeing in Russia who have just raised their bank rate from 10 to 17 percent.

I anticipate an interest increase in Canada next year IF the US increases it's rate AND if the Gov't decides that it wants to defend the CAD against a further decline cause by a US rate hike. The US Fed has already indicated that they may do this.

Not pretty. We get inflation with a devalued dollar and inflation with higher interest rates.


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## HaroldCrump (Jun 10, 2009)

The Bank of Canada and the Ministry of Finance has made it amply clear that they will not defend the currency.

The BOC nurses the foolhardy belief that a cheap currency boosts exports.
The MOF likes that approach as well because it plays well with general population & voter misconceptions, esp. auto & manufacturing lobby, and ridings that have lots of manufacturing jobs.

The BOC & MOF want to see the CAD$ in low 80s range, or even in the 70s range.

Also, compared to Russia, Canada does not have the resources to defend its currency.
The one & only tool that the BOC has is to raise interest rates.
That may (or may not) work, depending on where the price of oil & gold are headed.

BOC does not have the type of forex reserves that the CBR has to defend its currency.
And most importantly, Canada does not have even a fraction of the Gold reserves that Russia has to potentially partially backstop its currency.


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