Thursday 10 September 2026

We think the 5-year Government of Canada yield stays above 3.3% through October unless the Strait of Hormuz reopens, which keeps five-year fixed mortgage rates in the low-4% range. We also think the U.S. government’s US$90 fourth-quarter oil forecast is the optimistic case, not the base case.

Why we think so. Markets have stopped treating the Hormuz disruption as a short interruption and started pricing it as a supply regime. Brent settled near US$101 on Wednesday, above US$100 for the first time since July, after the U.S. Navy sank five Iranian tankers and Iran said it had struck ten ships in reply. WTI closed at US$95.39. Bond investors then priced the inflation that follows: the U.S. 10-year Treasury bond yieldBond yield The annual return an investor gets for lending to a government or company through a bond. Yields rise when bond prices fall. Fixed mortgage rates are priced from the 5-year Government of Canada yield. rose to 4.84% and the 2-year to 4.43%, both 52-week highs. Canada followed. The 5-year yield, which sets fixed mortgage pricing, was 3.44% at Tuesday’s close, up 4 basis points on the day and about 25 basis points higher than a month ago. When both oil and yields rise together, the market is saying it expects higher prices to last, not fade.

What the market is pricing. The U.S. Energy Information Administration’s outlook, published Tuesday, expects Brent to hold near US$90 through the fourth quarter before easing toward US$74 in 2027. That assumes a gradual return to normal supply. We think it is the hopeful path while tankers are being sunk and diesel is already at a record. In the bond market, a 25 basis point rise over a month is roughly what separates a 4.1% five-year fixed quote from a 4.35% one, and we do not see the conditions for that move to reverse before the end of October.

What it means. A barrel above US$100 reaches the pump within two weeks and the grocery bill within two months, since diesel moves nearly everything that gets to a shelf; the national average pump price passed $1.80 a litre on Wednesday. Households who drive a lot should treat a fuel line 15% above last spring’s budget as the realistic number for the rest of the year. Borrowers with a renewal in the next 120 days can ask for a rate hold, which costs nothing and protects against the direction yields are moving. The bigger risk is stacking: transport, heating, a variable-rate loan and a renewal in the next year all move the same way in a week like this, so it is worth adding up how much of monthly spending is exposed to both energy and interest rates. For investors, energy-heavy portfolios gained while the S&P/TSX Composite fell 1.1% to 36,123.

What would change our mind. The strait reopening to normal traffic, Brent back under US$85 for two weeks, or a Fed hold on 16 September with U.S. CPI on Friday at or below 3% over the year. Any of these would let Canadian yields fall and push the 5-year below 3.3%.

What to watch. Today’s U.S. EIA crude inventory figures (consensus a draw of 1.4 million barrels) and 30-year bond auction, Friday’s U.S. consumer price index for August, the Federal Reserve on 16 September and the Bank of Canada on 29 October.

We think the U.S. import ban is designed to be reversible in a negotiation, but we would not plan a business around it being reversed before 29 September. For the wider economy, it pushes the Bank of Canada toward a longer hold rather than a hike, even with oil above US$100.

Why we think so. The design gives it away. The White House will prohibit certain Canadian alcoholic beverages, dairy products and large motorcycles from 29 September under Section 338 of the Tariff Act of 1930, and a U.S. official said the products were chosen because Canada has little U.S. market share in them or because buyers can switch to other suppliers. Measures picked for their low cost to the side imposing them are also easy to withdraw, which makes them useful bargaining chips. At the same time, each round of this dispute is landing faster than the last, with only a week between Canada’s counter-tariffs and the U.S. reply. From 15 September, all-terrain vehicles and more dairy products face a 50% tariff while rock salt and cement come off the list, and U.S. federal purchasing schedules worth more than US$50 billion a year are to drop Canadian-origin products. A negotiation could reverse this, but nothing in the timetable suggests it will happen within three weeks.

The bigger picture. A ban is different from a tariff. A tariff makes a Canadian product dearer in the United States; a ban removes the market altogether. For distillers, wineries, dairy processors and their employees that is a revenue line falling to zero, not a squeeze on margins. For the economy as a whole, the effect arrives through the Canadian dollar, through provincial revenues in Ontario, Quebec and British Columbia, and through a central bank that now has to weigh a harder hit to growth against inflation from oil. A shock to growth of this kind makes a rate increase harder to justify, which is why we expect a longer hold.

What it means. A business owner with any U.S. sales should check both lists, the 15 September tariff additions and the 29 September ban, against their own product codes this week, and confirm what happens to goods already in transit on those dates. For an owner-manager, the planning question is continuity: how many months of fixed costs the company and the household could carry if U.S. revenue stopped on 29 September, and whether that runway is held in the business, personally, or nowhere. Households with concentrated exposure to one employer or one affected sector should hold more cash than usual this month. Borrowers should expect rates to stay where they are rather than rise or fall.

What would change our mind. An announced negotiation with a timetable before 29 September would make an early reversal of the ban likely. On the Bank of Canada, a Canadian August CPI print above 3% would put a hike back on the table despite the trade hit.

What to watch. The 15 September tariff additions and the 29 September ban, Prime Minister Mark Carney at the European Parliament on 16 and 17 September, the Federal Reserve on 16 September and the Bank of Canada on 29 October.

We agree that headline risk and portfolio risk are different things, and that Canadian households have been quietly insulated from the tariff war. For the rest of this year, though, we think the larger risk in many portfolios is not tariffs but an unintended concentration in foreign equities.

Why we think so. The Equitable Asset Management Group note of 26 August makes the case well. By its figures, the U.S. 50% tariff of 22 August touched roughly 5% of the value of Canadian exports to the United States, more than 80% of those exports still cross duty-free under CUSMA, and the S&P/TSX Composite set a record high on 25 August, three days after the tariff took effect. Statistics Canada’s figures this morning show why households have been sheltered: Canada’s net foreign asset position rose by a record $619.2 billion in the second quarter to $1,945.5 billion, mostly because the foreign stocks Canadians own rose faster than Canadian ones. In the quarter U.S. equities gained 14.9%, European 13.6%, Japanese 37.2% and Canadian 6.4%, and about 70% of Canadians’ international assets are equities. The affected sectors are a small share of the index and a smaller share of what households actually hold.

How this has played out before. In the 2025 tariff scare the U.S. market fell almost 20% between 19 February and 8 April 2025 and the Canadian market about 13%, before both recovered. The investor who sold on the headlines missed the recovery; the investor who held a single distillery or dairy processor did not recover in the same way. The lesson is about diversification, not about optimism. Our caution is the flip side: a quarter in which foreign markets beat Canada by that margin also means many portfolios now hold more U.S. and foreign equity than they were designed to, at a moment when U.S. yields near 4.8% make bonds a genuine alternative.

What it means. For investors, the practical check is the share of the portfolio in Canadian equities, U.S. equities and other foreign equities today against the share it was meant to have. If the drift is more than 5 points of the total, that is a rebalancing decision. Where each holding sits, an RRSP, a TFSA or a taxable account, decides whether it costs tax to make: rebalancing inside registered accounts is free of tax, while trimming in a taxable account can trigger a capital gains bill. That bill is a cost; an unintended concentration is a risk. They are not the same category. A written target mix, checked on a schedule, takes the decision out of the headlines.

What would change our mind. A broad decline in the Canadian index on the scale of the 2025 episode, about 13%, driven by tariff news rather than rates. That would mean headline risk had become portfolio risk, and we would say so.

What to watch. Friday’s U.S. consumer price index and Statistics Canada’s national balance sheet for the second quarter, the Federal Reserve on 16 September, and the U.S. import ban on 29 September.