Fed Rate Tanks. Biggest Cut Since 2008. Next Up... Canada?

This morning, the US Federal Reserve held its first emergency meeting of the Federal Open Market Committee (FOMC) since 2008 and announced a 50 basis point cut to its main policy rate. This cut, which brought the target range from 1.50-1.75% to 1.00-1.25%, was in response to the turmoil in global markets observed over the last week and the obvious slowdown in economic activity caused by the COVID-19 outbreak. Currently, the market is pricing in another 25 basis point cut at the Federal Reserve's next meeting on March 18th, and the yield on 10-year Treasury Notes dipped under 1.00%.

Tomorrow morning, the Bank of Canada will announce its own key policy rate. We're seeing a very high probability of a rate cut and the yields on fixed-income investments falling this week. We are therefore advising our clients to take action now.

Read the Federal Reserve's press release here.

Read our previous article about bond yields falling here.

Bank of Canada Rate Cut Probabilities Extremely High

The Bank of Canada has a mandate to use monetary policy to ensure stable growth and stable prices. In most circumstances, this requires monitoring economic measurables, interviewing market participants, and forecasting growth. In today's circumstances, with a viral outbreak significantly affecting markets and disrupting global supply chains and trade, it's not difficult to predict what they'll do. The risks that the Bank of Canada have been pointing too as potential motivations for a rate cut have become reality, and those same risks were the reasoning behind the FOMC's decision to cut rates today.

Below are the probabilities of a rate cut at the Bank of Canada's next meetings. These probabilities are based on the market for Overnight Index Swaps, and a value over 100% means that the market is pricing in more than one 25 basis point cut by that meeting.

Source: Bloomberg, March 3rd 

The market is thus pricing in more than two rate cuts in the next five months. Therefore, we're advising our clients to move their investments from prime-linked savings accounts to investments with fixed rates of return. The return on low-risk bonds has plummeted in the last week, reaching all-time lows, but there are still attractive GIC deposit options that offer a competitive and fixed rate of return. We believe this is a good opportunity to lock in today's rates before the Bank of Canada's announcement tomorrow.

Contact us for our latest deposit rates or a complimentary review of your portfolio. 

Disclaimer: Canaccord Genuity Corp. is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Investor Protection Fund (CIPF). The comments and opinions expressed in this commentary are solely the work of the Cash Management Group and Andrew Johns.