Something wicked this way comes

  By Guest Blogger Doug Rowat

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While the stock market’s largely shrugging off the Iran war, the bond market’s getting hit square in the eyes.

And inflation’s at the root of it.

US gasoline prices weren’t going to be at US$4.50 a gallon for long without there being an immediate impact on the cost of living. And the April US CPI report hammered that reality home. April inflation jumped 3.8% y-o-y, hitting its highest rate in three years and moving significantly higher than the 2.4% y-o-y February reading when investors were still holding out hope that inflation might actually hit the Fed’s idealized 2% target.

February seems like an eternity ago. The April inflation data had bond investors looking as startled as Kash Patel on FBI picture day and drove the US 10-year Treasury yield to almost 4.7%. It was below 4.0% in February before the war began.

We only have to look back a few years and the onset of another war—Ukraine—to know what the central-bank playbook is for handling escalating inflation: raising interest rates. Suddenly, it looks like 2026 could see rate tightening across the majority of the developed world’s central banks, including Canada:

Developed-market central-bank policy rates: the tightening begins

Source: DoubleLine

So far, the forecasts call for only modestly higher benchmark rates this year. But one central bank has already moved well ahead of the rest: The Reserve Bank of Australia. And its actions could be instructive for Canada. Earlier this month, the Australian central bank raised its benchmark rate to 4.35%, its THIRD consecutive rate increase this year, and the Bank didn’t mince words about the reason why: “The conflict in the Middle East has resulted in sharply higher fuel and related commodity prices, which are already adding to inflation.”

Australia’s annual inflation rate currently sits at 4.6%, driven by a massive increase in gasoline prices. This is above Canada’s inflation rate, of course, but ours is creeping up: 2.8% y-o-y in April, a 23-month high, and accelerating from 1.8% y-o-y in February. Several provinces are also now well above the 4% inflation mark. The Bank of Canada may be lagging the Reserve Bank of Australia, but its ultimate rate destination could very well be the same.

So, for Canadians faced with renewing a mortgage or with an outstanding balance on a HELOC, this presents a dilemma. According to the Canada Mortgage and Housing Corporation, the most popular option amongst borrowers in February was variable-rate mortgages. Again, February seems like an eternity ago.

However, much of the calculus on whether to go variable or fixed should come down to household budgeting. There are countless mortgage payment calculators online, so I won’t reinvent the wheel, but I’ll highlight that a $500,000 mortgage will cost a family roughly $5,000 more each year if their variable-rate mortgage jumps from, say, 3.75% (roughly what you might be able to secure currently) to 4.75%.

And for those who have been cruising along with a mortgage that was locked in years ago, the shock to the system at renewal time now will be even greater.

Additionally, for safety’s sake, budgets should be stress-tested under harsher conditions. Remember: during the 2022–23 inflation crisis, the Bank of Canada raised rates 10 times and six of those increases were 50 bps or more. So, what would your monthly household expenses look like if rates rose to 6% or even 7%, for example? And if you have a larger mortgage, naturally, the cost is even more impactful.

And HELOCs are more problematic as they’re always variable and their interest rates are generally higher (perhaps Prime plus 1%, or 5.45% presently). Keep this in mind if you’ve drawn deeply on your HELOC and especially if you’re borrowing from it to invest. Here your risk could be doubled up. Rising interest rates (and by extension rising bond yields) can be a headwind for equity markets as they slow growth and rising yields make fixed income comparatively more attractive than equities. So, the cost of servicing a HELOC may well be increasing at the same time as equity markets are hitting a rough patch.

To be clear, our outlook for equities is positive, the 26% y-o-y US corporate earnings growth in the first quarter alone is supportive of this outlook, and we’re already seeing signs that the Strait of Hormuz bottleneck may ease. NATO, for example, is reportedly discussing the possibility of helping ships pass through it. And I’ve talked previously on this blog about how the outcome of the US mid-terms in November could ultimately limit Trump’s war funding. But Canadians need to be aware of what may be looming if the Iran conflict continues and oil prices remain elevated. In the end, inflation will have the final word on where interest rates are headed.

And when you have bills to pay, cost certainty matters. Given what may be on the horizon, don’t put your financial life entirely in the hands of the variable-rate gods.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

Source: https://www.greaterfool.ca/2026/05/23/something-wicked-this-way-comes/