“I love the inflation.” These are four words no sitting U.S. president should say near a microphone, ever. Yet that is exactly what we heard from the world’s most powerful man on Wednesday.
The Context of the Comment
U.S. President Donald Trump made the remark as inflation runs at roughly twice the central bank’s target. The country desperately needs cheap money to finance its colossal national debt, and global investors—who flee from inflation—are essential to keep buying America’s ballooning pile of federal IOUs.
Now, if you are an institution that dreads inflation eating your fixed income returns—and every bond investor does—this little confession will not make you more likely to buy U.S. Treasuries. Probably not. A president celebrating a three-year high in CPI growth signals zero fiscal or political urgency to fight it.
Impact on Bond Markets
If markets start believing Washington is genuinely inflation-tolerant, especially alongside Trump’s Fed-pressure rhetoric, the risk premium on bonds creeps up. At this point, with gold recently overtaking Treasuries as the world’s number one reserve asset, BRIC nations dumping Treasuries, and 30-year U.S. bonds near a two-decade high, America needs all the bond buyers it can find.
Canadian Mortgage Rates at Risk
What does this have to do with Canadian mortgage rates? The answer is that mortgage rates take their orders mainly from the bond market, so rising term premiums are not what borrowers want to see. Term premiums refer to the extra yield investors demand for bearing risks of longer-term bonds.
Meanwhile, Canadian yields follow U.S. yields like they are on a leash. For five-year bonds, thanks to cross-border capital ties and economic linkages, the monthly correlation between American and Canadian yields is a sky-high 0.976 since 1980 and 0.961 in the last decade. That is not a relationship; it is a hostage situation. And starting last year, the hostage taker started becoming increasingly unstable.
Financial Consequences
Even if Trump’s reckless comments added a mere 10 basis points to mortgage rates over time—roughly $1,400 of interest on a new five-year $300,000 mortgage—that is money no one would have paid if his mouth only had an off switch.
Now, it is very possible that things get back to normal once Donald has been shown the door in 951 days, 12 hours and 24 minutes (as this is being written). But two and a half more years in power leave ample runway to inflict lasting damage on America’s reputation.
Trump's Policy Record
In 17 months alone, the President has ushered in major tariffs, an oil shock, eye-watering budget deficits, immigration restrictions and deportations, a reshoring push, tax cuts, and assaults on Fed credibility.
