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APRIL 2017
Debt Market Monitor
National Debt Capital Markets Services
Musings on longer-term inflation and interest rates
After nearly exhausting the topic of a potential interest rate increase,
the U.S. Federal Reserve surprised no one with its move to hike the fed
funds rate by 0.25% at its March meeting.
The focus of the markets is now on how many interest rate increases
will occur during the remainder of 2017. The consensus view,
including that of the Fed, is that another two or three hikes will occur.
However, this generally held view of further interest rate increases in
the short term may not reflect longer-term realities.
With unemployment at less than 4.7%, inflation averaged 1.3% in 2016
and climbing above 2% in early 2017, and wage growth stumbling
along; everything seems to be aligned for a normalization of interest
rates – according to the data-dependent Fed. However, the U.S. is
grappling with an aging population, excessive amounts of debt and
declining spending powers of the middle class, and inflation – the
main driver of higher rates. Therefore, corresponding interest rate increases may be a lot further off in the future than expected.
Sure, there will be some cyclical spikes in inflation and interest rates; however, overall, one can reasonably argue that interest
rates should remain low in order to avoid a recession. One of the primary contributors to interest-rate suppression is the strong
American dollar, which has the effect of lowering import prices and reducing inflation. Conversely, a strong U.S. dollar makes
exports become more expensive and, therefore, lowers demand. Inflation takes place when prices rise – you spend more money
to buy goods and services or, alternately, there is too much money chasing too few goods and services.
Central banks around the world have pulled out all the stops to increase inflation and to maintain it at a 2% level. They have
applied every conceivable policy to move and hold inflation rates higher, all with very limited success. A 2014 Bloomberg survey
of 67 economists showed that all predicted that inflation would be higher in six months. In fact, rates fell sharply. At the onset of
the financial crisis in 2007, the Fed’s official target rate was 5.25%. Recently, the board of governors’ median forecast for the Fed
funds rate over the longer term was only 3.5%.
Across the advanced world, the most significant problems of the past several years have been centred on weak demand,
oversupply, low inflation and resulting very-low interest rates. The simple fact that the Fed is poised to raise rates a bit more above
zero does not, in itself, ease any of those burdens. Predictions on whether interest rates will be high or low a few years from now
have little to do with what the Fed has done recently by raising rates. Movement of interest rates does have a lot to do with what
happens with forces deep inside the economy that are poorly understood and extremely hard to forecast. Just because some
people are old enough to remember high inflation and rates of the 1970s and 1980s does not mean that those rates are the
norms to which the economy will inevitably revert.
Fiscal Snapshot
Indicative Commercial Mortgage Spreads*
Over Government of Canada Bond Yields
Bank of Canada Rate
March 2017
One month ago
One year ago
BoC Rate
Bank Prime Lending
Conventional
5-Year
10-Year
0.75
0.75
0.75
2.70
2.70
2.70
March 2017
1.70 - 2.10
1.85 - 2.35
One year ago
1.85 - 2.20
1.95 - 2.30
5-Year
10-Year
March 2017
0.90 – 1.10
0.90 – 1.10
One year ago
1.00 - 1.25
1.05 - 1.25
Insured
Government of Canada Benchmark Bond Yields
March 2017
One month ago
One year ago
5-Year
10-Year
Long
1.12
1.09
0.68
1.63
1.62
1.23
2.32
2.34
2.00
*Spreads are indicative of high quality real estate in major Canadian markets.
N AT I O N A L D E B T C A P I TA L M A R K E T S S E R V I C E S
Highlighted Transaction
Asset Type
Industrial Portfolio – multiple sites
Location
Major Canadian city
Facility Details
Freehold blanket senior facility in the amount of $18M
Intelligent Debt Financing Solutions
The Avison Young National Debt Capital Markets dedicated team
is focused on providing innovative North American-wide debt
and equity solutions to accomplish goals. We originate debt and
equity for all types of real estate and all types of clients. Debt
origination includes fixed and floating rate structures, permanent
and construction financing, structured finance, bridge and
mezzanine debt and insured agency financing - CMHC and Fannie
Mae / Freddie Mac.
Our years of combined debt/equity capital markets experience has
created meaningful relationships that we can put to work for you.
Please contact our National Debt Capital Markets team for more details
related to debt financings or real estate transactions.
Norm Arychuk, Broker*
416.673.4006
[email protected]
Michael Ho, Mortgage Agent**
416.673.4012
[email protected]
*Licence #: M09002260
Brokerage Licence #10637
**Licence: # M15000834
Brokerage Licence #10637
Avison Young is the world’s fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative,
global firm owned and operated by its principals. Founded in 1978, the company comprises over 2,200 real estate professionals in 77 offices providing
value-added, client-centric investment sales, leasing, advisory, management, financing and debt placement services to owners and occupiers of all
property types.
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