Canadian household debt represents a concern for policymakers, but our Global Fixed Income Strategy service argues that domestic imbalances may not call the Bank of Canada (BoC) to action yet.
T he BoC continues to worry about domestic imbalances, including household indebtedness and the possibility of a sharp housing slowdown. Indeed, Canadians now carry more debt relative to disposable income than Americans. However, despite the heavy debt load, the debt service ratio remains much lower in Canada than in the U.S. Importantly, Canadians have substantial non-housing related wealth and a far larger share of Canadian homeowners do not carry a mortgage. This means that if home prices in Canada do contract, far fewer homeowners will find themselves in negative equity positions.
Bottom line: Household indebtedness and the housing market are not likely to call the BoC to action soon. A more dovish tone from the BoC at the last meeting means that the market has shifted from pricing in 50 bps of rate hikes within 12 months one month ago, to currently expecting no change in rates. The latter seems appropriate since it is unlikely the BoC will significantly front-run the Fed.
Remain neutral Canadian bonds in a hedged portfolio.