In an effort to battle COVID-19 and save their economies from collapse, governments around the world borrowed unprecedented amounts of money to support their citizens and businesses. At the same time, central banks slashed their key lending rates to make borrowing cheaper. With the rollout of vaccines taking place and an opening of the economy in sight, Canadians have to contend with mountains of debt and interest payments.
How Will Debt Levels Hurt the Stock Market?
During 2020, governments around the world issued an eyewatering $16.3 trillion in debt. And they’re expected to borrow an additional $12.6 trillion in 2021.
Corporations took advantage of unprecedented monetary policies and sold bonds at record paces. Households meanwhile deferred payments on everything from rents to mortgages, credit card payments, car loans, and commercial rents. That needs to be paid back.
But there are growing concerns that a strong economic comeback this summer could lead to inflation. This could force central banks to raise interest rates sooner than expected.
That could wreak havoc on businesses and households. We’re already seeing how this could impact the stock market. The yield on the 10-year U.S. Treasury recently climbed above 1.6%; its highest level in more than a year and up significantly from 1.1% earlier this year.
The yield on the 10-year U.K. bond rose above 0.8%, a big jump from the start of the year when it was at 0.2%. Meanwhile in Canada, the 10-year bond is, as of this writing, at 1.53%, a huge increase from 0.68% in early January.
The yields on 10-year bonds have been spiking by growing confidence that the COVID-19 vaccines will mean an end to COVID-19 and restrictive lockdown measures. Cooped up consumers are expected to rush to restaurants, stores, and jump on planes. This could push up prices.
Central banks have promised to keep inflation under control, but interest rates cannot stay this low forever. And a big jump in interest rates would be very damaging. Not only will it make it more costly to borrow money, but it also makes it more expensive to service that debt. And again, businesses and households have taken on a mountain of debt.
Canadian household debt stands at 170.7. That means Canadian households owe $1.71 for every dollar of disposable income. Again, that needs to be paid back, but it will be difficult for cash-strapped, debt-laden Canadians and businesses. It will be even more difficult if interest rates unexpectedly rise.
The Bank of Canada, which kept its overnight lending rate target at 0.25%, said it won’t raise rates until 2023. But economists believe the Bank of Canada could be forced to if the Canadian and global economies recover more quickly than expected.
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To stave off COVID-19, governments, businesses, and households took on a mountain of debt. With an economic recovery in sight, there is a real risk that central banks could be forced to raise interest rates. We already know what an unexpected rise in bond yields can do to the stock market. Whether the economy whips back faster than expected or interest rates rise, the expert traders at Learn-To-Trade.com can teach you how to make money in any environment.
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