BMO Capital Markets economist Robert Kavcic joins Bipan Rai on the Open Outcry podcast1 to lay out a frank, unsentimental read of where Canadian and U.S. markets stand as bond yields climb and the housing market grinds through a reset that is measured in years, not quarters.
The conversation opens on a deceptively simple observation. Higher bond yields, so often framed as punishment for investors, are also something else entirely: an opportunity. "As an investor and a saver," Kavcic notes, "all of a sudden I can go out there and pick up 4 or 5% yield on the bond side of my portfolio." After years of financial repression, the 60/40 portfolio, long dismissed as a relic, is back in play. That framing sets the tone for what follows: a rigorous, methodical accounting of what higher-for-longer rates actually mean across equities, housing, household balance sheets, and the Bank of Canada's decision path.
Why Equities Have Held Up
To understand why equity markets have remained resilient despite the sharp move higher in Treasury yields, Kavcic points to the composition of the rate rise itself. "Most of the increase in longer yields has not been on the back of things like inflation expectations. It's been on the back of underlying real rates." The driver is strong real economic growth and robust earnings, not inflation fear. Valuations look stretched in isolation, but as Kavcic is quick to clarify, "expensive valuations have never been a sufficient condition to break the bull market." The risk is real but it is downstream. Early Fed tightening produces corrections; it does not end cycles. That happens later, when the economy cracks under the accumulated weight of policy. "Historically, it's been anywhere from one, two, three, or four years later where that underlying growth cracks and now valuations are kind of hung out to dry."
Beneath the index-level resilience, however, pockets of weakness are already visible. "The hyperscalers or the Mag 7 taking up such a big chunk of the overall index" are masking 5 to 15% corrections in interest-rate-sensitive sectors. The headline index flatters.
The Bank of Canada's Path
On Canadian monetary policy, Kavcic offers a more measured read than market pricing implies. With the CAD swaps curve pricing roughly 111 basis points of tightening through end-2027, his view is straightforward: "Bank of Canada pricing is too aggressive." He acknowledges the case for hikes, given above-potential growth running at nearly 3.5% in Q2, but cautions that a clean 100-basis-point tightening path assumes away the trade war overhang. The official BMO view keeps the Bank on hold into 2027, contingent on upcoming data. Two key reports, a business outlook survey and a fresh CPI print expected October 19th, will be telling.
A Secular Reset in Housing
The sharpest and most consequential insights concern Canadian housing. Kavcic called the correction at the start of 2022, and his framing has not changed. "It was gonna be years. It was not gonna be months or quarters." The market is resetting to a world where "cash flow matters, cap rates matter relative to risk-free yields." With government bond yields at 4%, the 3% cap rates that characterized the investment thesis during the zero-rate era simply do not hold. Buyers are absent for a reason.
Crucially, Kavcic offers a contrarian view on the supply narrative that has dominated policy debate. "I've kind of been of the view that we have a demand problem in Canadian housing." The collision of peak millennial household formation, 3.5% population growth driven by immigration, and zero-rate-era borrowing psychology created the cycle. Now that immigration policy has shifted and population growth has slowed sharply, rental demand has fallen with it. "Why would you go in there with valuations that are still too high when you have four percent risk-free money? Unless I can bank on rent growth. But I can't bank on a whole lot of rent growth when the supply pipeline for rentals is very, very full."
On the mortgage renewal wave, Kavcic is notably calm. Stress-testing meant borrowers qualified at 5.25% even when taking 1.5% mortgages in 2021. "Peak renewal activity was actually through the spring and early summer of 2026. So if we haven't cracked yet, I don't think we're gonna crack." As long as employment holds, the financial system can absorb it.
Restoration of affordability now depends almost entirely on income growth. Prices fell 15% to 25% depending on market. Rates are no longer declining. Only time and wages close the gap. "We're just not there yet."
5 Key Takeaways for Advisors and Investors
- The 60/40 is back. With 4 to 5% available in bonds, fixed income deserves a serious look again. Advisors should revisit balanced allocations with clients who have been underweight duration for years.
- Equity resilience is real but uneven. Headline index strength masks meaningful corrections beneath the surface. Sector and factor exposure matters more than it has in years.
- Bank of Canada hikes are possible, but market pricing is stretched. Build scenarios that include a Bank of Canada on hold, not just the aggressive tightening path the swaps curve implies.
- Canadian housing is a years-long reset, not a months-long dip. Condos face further downside. Single-family in supply-scarce urban markets is stabilizing, not recovering. Investors need to recalibrate return expectations relative to risk-free alternatives.
- Canadian household balance sheets are more resilient than the headlines suggest. Strong liquid asset positions and conservative mortgage stress-testing mean the renewal wave is manageable. The systemic risk is lower than the anxiety suggests.
Footnote:
1 Rai, Bipan, host, and Robert Kavcic, guest. "Impact of Higher Rates on Canada's Housing Slump." Open Outcry, episode 46, BMO Global Asset Management, 6 Oct. 2026, www.bmoetfs.ca/articles/the-open-outcry-podcast-impact-of-higher-rates-on-canadas-housing-slump-october-6-2026.
