The global sell-off in bonds is a sign of acceptance that higher interest rates will be around for longer, experts say, noting that the shift holds implications for borrowing rates and mortgage holders.

Here’s what Canadians should know:

WHAT IS HAPPENING WITH BOND MARKETS?

Yields among both the U.S. and Canadian bond markets hit 16-year highs earlier this week. The trend comes after fresh signals from central banks in both countries suggesting elevated interest rates will last for some time yet.

The Bank of Canada has hinted that elevated rates may be here for a while, emphasizing the “ongoing concern” in inflation data to thwart expectations of cuts in the near future. Meanwhile, the U.S. Federal Reserve has indicated another hike could be on the way this year, with just two expected cuts in 2024.

Bill Blain, market strategist at Shard Capital, said the shift in the bond market represents an acceptance that higher interest rates may be with us for longer than anticipated, meaning investors are expecting the higher yields are here to stay for longer and thus justifying a shift in assets.

“What’s truly happening now is people understand interest rates (are) normalizing, they’re going to remain higher for longer and that means that the frothiness, the speculative bubble that has fuelled stocks for so long is under pressure,” he told BNN Bloomberg in a Thursday television interview.

Jules Boudreau, a senior economist with Mackenzie Investments, also pointed to the major players – such as U.S. banks and foreign buyers – now leaving the bond market and an abundance of supply as factors behind the sell-off.

“If you combine all those things, the Fed that says that it's going to keep interest rates higher for longer, your big buyers that are on strike, and the fact that you've had record supply that is still increasing in terms of long-term rates, (that) has caused long-term yields on bonds to go up in the U.S., (and) also in Canada,” he told BNNBloomberg.ca in a phone interview Thursday.

Additionally, investors with long-term bonds with lower interest rates are selling their assets for new bonds with shorter maturation times and higher rates.

“The yield curve is inverted, meaning you earn more money lending to companies or governments for one year than you earn for 30 years, so let’s lend to them for a short period of time and earn more and also it’s a lot less volatile,” Etienne Bordeleau-Labrecque, vice president and portfolio manager at Ninepoint Partners, told BNN Bloomberg in a television interview.

WHAT DOES IT MEAN FOR CANADIANS?

The bond sell-off is expected to have a big impact on Canadians’ mortgage rates, as the signal of higher rates for longer will impact those with fixed-rate mortgages when it comes time to renew.

Boudreau said mortgage effects likely won’t be felt until 2025 and 2026 when far more borrowers will find their mortgages up for renewal.

“It's possible that rates on five-year bonds on which five-year mortgages are priced will go down before that, but if they don't … that means a lot of people will be right refinancing with payments that are two, two-and-a-half times … than what they’ve been paying right now,” he said.

Boudreau expects the sell-off will help cool the housing market.

“We should expect a drying up … and probably a decline in prices, at least to pull back what we got in gains in 2023 in terms of real estate prices,” he said.

Housing market impacts aside, Boudreau said he doesn’t think the bond trends will be “dramatic” for the Canada economy as a whole.

“I think the rest of the economy is still pretty rate resilient,” he said.

Blain doesn’t expect rate cuts until at least the summer of 2024, likely later, but he stressed that it isn’t something to worry about, as economies have historically been able to cope with high rates.

“Bond rates were five per cent for the early parts of this millennium until the global financial crisis kicked off in 2008,” he said.

“In the 1980s, we had interest rates in the U.K. up to 18 per cent, and you know what, the economy copes with them.”

MONEY TO BE MADE IN FIXED INCOME

Naseem Husain, senior vice president and ETF strategist with Horizons ETFs, also believes higher bond yields are not the end of the world, as investors can get a good return on a stable investment.

“For the last couple years, it’s really been a challenging space and now we’re seeing these yield numbers like five per cent, which really can get investors’ attention,” he said.

“It’s been the year of fixed-income, people are looking at these numbers and saying ‘this is investable again.’”

Bordeleau-Labrecque agreed that the current bond market is advantageous.

“Because interest rates are so much higher now, the price has gone down a lot, so you can buy these short-term bonds with really low prices and what that means is yes, you’re earning an all-in yield that’s pretty attractive, but also it’s going to be more tax-effective,” he said.

Kristina Hooper, chief global market strategist at Invesco, suggested investors consider a diversified portfolio that includes fixed income, international stocks and real estate – a combination she said is ideal in an economic slowdown.

“There is a risk that yields go higher from here, but I suspect it would be very short-term in nature if they do,” she said. “For those with a long time horizon, it would make sense to at least take some of their portfolio and lock in those higher yields, even if we could see them going even higher.”

Hooper said she expects the yield to drop significantly by this time next year, so the time is now to lock in those rates.