Is Canada on the brink of its own Big Short?

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Canada’s economy is under severe pressure. Household debt has just surpassed a staggering $3 trillion, a record that signals serious financial strain across the country. “Household debt shatters $3 trillion milestone—mortgage borrowing slows, but consumer debt surges as households scramble to stay afloat,” reports the Financial Post. Consumers are feeling the weight of their loans more than ever, and the trend is only getting worse. This debt crisis is not limited to mortgages—consumer debt is rising as Canadians struggle to manage costs in an inflationary environment.

Bond yields are spiking too. In the past two months alone, bond yields have increased by 61 basis points. This means borrowing is getting more expensive, and higher borrowing costs threaten to squeeze the financial sector even further. The Financial Post notes, “Bond yields up 61 bps in 2 months.” The financial system is facing the risk of a liquidity crunch if these yields continue to rise, which could slow down the broader economy.

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Inflation, although mild at 2.0% in October, is still a threat. “Govt spending adds fuel to inflation,” highlights the Financial Post. Inflation’s impact, especially when combined with the government’s rising spending, only exacerbates the situation. Government spending is injecting more money into the economy, increasing the price of goods and services. While inflation at 2% doesn’t seem alarming, when combined with rising debt and bond yields, it starts to look like the perfect storm.

Mortgage rates are shifting as well. Fixed mortgage rates are climbing rapidly, making home ownership more expensive for Canadians. Meanwhile, the Bank of Canada’s recent rate cuts have boosted demand for variable rates, but this comes with its own set of risks. “Fixed rates climb, but BoC cuts boost variable demand,” reports the Financial Post. Homebuyers who took advantage of low variable rates may soon face higher monthly payments as interest rates rise again.

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This confluence of rising household debt, higher bond yields, and inflationary pressures is building a financial crisis that could dwarf the 2008 meltdown. The writing is on the wall.

Sources
financialpost.com/news/economy/canada-household-debt-surpasses-3-trillion

financialpost.com/news/economy/bond-yields-rise-61-bps

financialpost.com/news/economy/inflation-hits-2-percent-october

financialpost.com/news/economy/government-spending-inflation

financialpost.com/news/economy/fixed-rates-climb-boc-cuts-variable-demand


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