Will Fixed Rates Fall?

A reader asked us this question yesterday:  "As the 5 year bond rates are falling, do you see fixed rates falling soon?"

Truth is, it's a tough answer.  

Bonds yields have dropped about 1/2% since June 12.  Normally lenders would have lowered their fixed rates as a result.  But the whole credit/liquidity crunch has changed things. 

With all the panic in the subprime space, the spread between bonds and 5-year fixed mortgages has widened from 120 basis points in August to 165 basis points today.  That means Canadian lenders have to pay more to borrow, and that's offsetting the benefit of lower bond yields.

In time, spreads will return to some semblance of historic normalcy, but "when?" is the question.  3-12 months is the best estimates we've got.

Currently bond yields are near technical support, and they'd probably have to break much lower if fixed rates are to drop in the short term. 

But alas, take that with salt.  We still haven't found a crystal interest rate ball that works as well as we'd like.

Comments

[FrugalTrader]

Mel, how else do you see the liquidity crunch affecting Canadian consumers/borrowers?

[Online Mortgage Broker]

Hi FT,

There are lots of possibilities. Here are three:

1. Interest rates on most types of debt with above-average risk will likely remain higher than normal in the short-to-medium term. Tighter liquidity of any sort can have a dampening economic effect.

2. Similarly, low-interest promotions accessible to those with even average credit may dry up, also affecting consumer spending.

3. Depending how severe the crunch and U.S. economic downturn gets, it's not unthinkable to contemplate adverse effects on certain high-priced Canadian housing markets (Van, Calgary, Edmonton, etc.).

Hopefully these scenarios don't fully materialize, but we should be cognizant of the risks.

Cheers.
Melanie