The Bank of Canada’s estimated term premium demanded by investors has been on a steady grind higher since 2020, reaching 15-year highs…

… on the back of a surge in new debt issuance.

While broader economic challenges (unemployment, housing, trade, etc.) have kept a partial lid on the long end, sticky inflation is raising the odds of rate hikes in the near term…

… which should put upward pressure on government interest expense and in turn, the federal debt service ratio. With the PBO expecting the ratio to break 13% by 2030, it might not be long before we break the “David Dodge Rule”…

… and corporates should feel it too, given higher benchmark yields should impact variable rate debt and create refinancing pressure on near-term maturities.

Companies with large floating rate exposure like Pet Valu (PET) would feel it most, which could prompt a wave of hedging activity at the rate desks of the Big-6 banks…

… who should also benefit from higher mortgage rates on renewal (if credit quality holds), which move in tandem with government 5-year yields.

On the consumer side, higher mortgage costs should eat into discretionary budgets…

… which investors have been pricing in, with the consumer discretionary basket down big despite objectively good prints from names like Aritzia and Groupe Dynamite.