Every once in a while you may get a notice from your bank. Your account’s monthly fees are going up. It may be a modest difference, of a dollar or so. You may write it off as the cost of doing business with your financial institution.
But right now, that fee hike may be a symptom of a broader economic phenomenon. It affects almost everything about your money, from how much you may pay for a mortgage to how much return you get on your savings.
What is it? The yield curve, which in Canada is teetering between flat and inverted. An inverted yield curve is uncommon, and it has ripple effects throughout the financial industry.
What is the Yield Curve?
The yield curve shows the relationship between expected returns on short-term versus long-term fixed income instruments. We’re talking here about how much banks make on the purchase of government treasury bonds.
When things are normal, the curve plots upwards. Typically, longer term vehicles bring in a greater return. When the curve is flat, or plots down, it means there’s less return on long-term investments than on short-term.
What Does This Mean?
This may sound like gibberish. As long as there’s some return, who cares when it comes in? Well, as it turns out this is a big issue for banks. The normal course of business is to reward short-term depositors with relatively low interest rates. Banks then take that money and lend it out at higher rates for longer terms. That keeps their profit margins stable.
When banks can no longer rely on this formula, they look at other ways of keeping their profits intact. Plus, those interest rates affect your own financial instruments. Your debt may cost more and it may be harder to make money on your savings.
How Does This Affect Consumers?
Higher bank fees are one potential side effect of a flat or inverted yield curve. So, you might expect to get more of those bank notices soon. Also, you may see the cost of your adjustable rate debt go up. This is because the interest you pay is usually based on short-term rates. That directly affects your adjustable rate mortgage or line or credit.
It’s Not All Bad News
The pressure on big banks has created an opening for new financial players. A new virtual bank run by an Ontario credit union is offering favorable rates on savings and mortgages. According to the columnist, member-owned credit unions do not face the same pressure to maintain profits as do shareholder-owned banks.
So, before you think it’s all doom and gloom, review all your investment and borrowing options. There may be more out there than you think.
Find the Best Rates
A good place to start your research is Ratesupermarket.ca. You can find the latest rates on mortgages, loans, and investments. We also offer helpful guides on how to make the best decision about your money.