Why Aren't Rates Going Down?

People have been asking why fixed mortgage rates aren't going down, even though bond rates have dropped over 1/2% since their June high.

MyNext Mortgage's VP of Capital Markets and Treasurer, Boris Kogut, offers this explanation:

“…..all the credit spreads have widened, while the Government of Canada (GOC) bond yields have fallen.  This has resulted in a disconnect of the historical relationship between mortgage rates and GOC rates.  The impact of widening credit spreads is that all mortgage lenders are now paying a higher spread over the GOC rates to borrow funds (and lend these funds to mortgagors.) 

The credit spreads have widened most for non-conforming mortgages, but have only impacted conforming mortgage rates by 20 – 30bp’s (i.e. if credit spreads had not widened, current conforming mortgage rates would have been 20-30bp’s lower.)   This is not just a Canadian phenomenon – it is also taking place in the US and Europe and the expectation is that this will go on for months to come….”

How long will this situation take to resolve itself?  Our industry sources predict from 3 to 12 months. 

In the meantime, 5-year bond rates keep going down, settling Friday near a 4-month low.