Rates headed higher

How investors can protect themselves

The escalating trade war between Canada and the U.S. has been the headline story over the past few weeks. It’s a big story for Canadians and may have contributed to the drop in the TSX over the past month. But New York has been paying more attention to something else: rising interest rates, sparked by rising oil prices.

The European Central Bank raised its target rate by a quarter of a percentage point last month. The U.S. Federal Reserve Board followed suit. The Bank of Canada is holding steady so far. But the bond market is doing its own thing, and that has many people worried.

The reality is that the interest rate holiday we’ve enjoyed since the Great Recession is over. Long rates are rising quickly, bringing with them growing inflation fears.

Rates were scaled back dramatically to help stabilize the global economy during the financial crisis of 2007-2009. It worked, barely, but then came Covid. The global shutdown of 2020-21 forced central banks to drop rates to near zero (and in some cases to negative levels) once again.

Covid also forced governments to make massive spending commitments to bail out businesses and individuals whose incomes were reduced or wiped out. That high level of spending has continued even though the pandemic is well behind us. The U.S. government is now facing interest costs that are equivalent to 3.3% of the country’s GDP.

A look at a chart of 30-year rates on sovereign bonds is revealing. Japan, which has long been a low-rate country, was paying 0.16% in late 2019. Those bonds are now yielding just over 4% according to data from Bloomberg.

Even though the Bank of Canada and the U.S. Federal Reserve Board have been reluctant to raise rates, the bond markets are doing it for them. This is having an impact on long-term mortgage rates, credit card rates, car sales and leases, and more.

The Bank of Canada kept rates unchanged at its September review, citing a broadening economic recovery for its stand-pat decision.

“However, the upside risks to inflation have increased, while new tariffs make growth prospects more uncertain,” the Bank said in a statement. “Governing Council will assess the sustainability of the economic rebound and the outlook for inflation and is prepared to adjust monetary policy as needed. The Bank remains committed to maintaining Canadians’ confidence in price stability through this period of global upheaval.”

New Federal Reserve Chair Kevin Warsh has also warned that U.S. rates may have to rise. Speaking at the August Jackson Hole symposium, he said that stubborn inflation could force the central bank to raise interest rates again in the coming months.

Meantime, Trump’s tariffs and the high price of oil will continue to feed the inflation fears that are driving up long rates.

The probability is growing that the next move in North American interest rates is likely to be up. That would have a negative effect on the prices of long-term bonds and bond ETFs, as well as interest-sensitive stocks like utilities, REITs, and heavily leveraged companies.

Banks could swing either way. Higher rates can improve their bottom lines by increasing the spread (net interest margin) between what they can charge borrowers and what they must pay to depositors. But if higher rates lead to decreased business activity and lower borrowing, the impact on bank bottom lines would be negative.

And all this is happening in September and October, historically the two worst months of the year for equities.

Investment implications

In this climate, investors should consider reducing their exposure to high-volatility stocks and take some profits. Focus on lower-risk securities instead. A reduced return is better than riding a market plunge.

The safest investments in a rising interest rate environment are short-term cash-type securities. Here are some examples, which are tracked in my Internet Wealth Builder newsletter.

Inflation protected bonds and funds. For example, iShares 0-5 Year TIPs Bond Index ETF (TSX: XSTP) gained 3.2% in the 12 months to Aug. 31 and has an average annual compound rate of return of 5.4% since it was launched in July 2021. It has never lost money in a calendar year.

Savings account ETFs. These invest in high-interest deposit accounts at major Canadian banks. If short-term interest rates rise, their monthly payout should too. Most were launched at $50, and the price rarely swings more than 10 cents on either side of that. The CI High Interest Savings ETF (TSX: CSAV) was up 2.1% in the year to Aug. 31. CSAV is another ETF that has never lost money in a calendar year.

Money Market ETFs. As the name indicates, these invest in low-risk, short-term securities such as Treasury bills. Guardian Capital offers two that are worth considering. The Guardian Ultra-Short Canadian T-Bill Fund (TSX: GCTB) invests in a portfolio of federal, provincial, and corporate short-term bonds. It gained 2.0% in the year to Aug. 31. The companion Guardian Ultra-Short US T-Bill Fund (TSX: GUTB.U) invests entirely in U.S. government T-bills. It showed a return of 3.7% in the year to Aug. 31. Both ETFs have an MER of 0.12%.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

Content © 2026 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

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