Mortgage Bytes

March 02, 2009

Mortgage Bytes

The Bank of Canada & Rates

Fixed income traders are pricing in a 100% chance that the Bank of Canada will cut rates 1/4% on Tuesday, and a 75% chance of a 1/2% cut. (CEP)
1/2%. That’s the median rate cut forecast of 17 major economists surveyed by Bloomberg. (Bloomberg)
CIBC says “The Bank of Canada’s final half-point cut is fully priced in, leaving no room for an impact on government bond yields.” If CIBC is right and the 5-year bond yield doesn’t fall, fixed mortgage rates may have only two ways to go: sideways or up.
CIBC is forecasting an increase in prime rate by the end of this year.
“We expect the Bank of Canada to cut interest rates by 50 basis points…This would bring the overnight target rate to a record low of 0.50%, where we expect it to remain into 2010.” – TD economist, Dina Cover (TD)
Low core inflation "opens the door wide for another 50 basis-point (rate) cut…," says RBC analyst Matthew Strauss. (Globe)
InYourBestInterest.ca’s Hank Cunningham says the 2-year Canadian bond is a good indicator of future monetary policy. This chart suggests that 2-year bond traders don’t expect the BoC to cut much more. (Of course, there’s not much more to cut)

Rate Commentary

There is clear evidence that very low interest rates are not working to expand economic activity…You can cut rates to near zero, you can stimulate the domestic economy through fiscal policy, but you still need a rebound in the U.S. and European economies.” –- TD’s head economist, Doug Porter (Globe)
If the BoC lowers rates Tuesday, variable-rate mortgagors will be happy. Fixed-rate mortgagors with a long time to maturity won’t be as thrilled. People in fixed-rate mortgages generally have to pay IRD penalties to refinance. As a result, Kyle Green, a broker with Mortgage Alliance, says: “Each rate drop can add to your penalty to break your existing mortgage.”
“With rates this low, the major banks would be unlikely to pass on the full benefit of a 50 basis point cut to their customers.” -- Andrew Willis of the Globe & Mail
Who said prime minus was dead?! Cambrian Credit Union is advertising the country’s lowest 5-year variable rate at prime – 0.01%. Hooray! Too bad they primarily lend only in Manitoba.
“It would appear that the days of Prime - .90 are gone forever, but we may very well see Prime - .25 again.” – Mortgage Centre Broker, Peter Kinch
Variable-rate mortgage spreads (margins) have improved, but broker Marcus Tzaferis says banks “will not transfer the reduced cost associated with holding their VRM’s on to [consumers] until it becomes obvious that their margins on the VRM’s have been healthy for an extended period of time.” As a result, Tzaferis recommends a 1-year fixed mortgage until variables are available at better rates. “We believe that in 12 months the VRM market will be priced far more aggressively,” he says.
U.S. bonds “are one gigantic Ponzi scheme” says Peter Schiff of Euro Pacific Capital. Bonds are in a enormous bubble that Schiff says “ultimately will collapse.” If he’s even half right, U.S. yields may rise considerably. That would in turn push up Canadian yields. BNN via YouTube
Economic stimulus can take upwards of 1-1.5 years to work its way through the economy. It could therefore be 1-3 more quarters before the BoC’s rate cuts start reviving the Canadian economy. Only then might inflation make a comeback, and everyone knows what that means. Where there is smoke (inflation), fire (rate hikes) usually follows.

Posted in Mortgage Commentary, Mortgage Rate Trends

Comments

The Bank of Canada & Rates

Fixed income traders are pricing in a 100% chance that the Bank of Canada will cut rates 1/4% on Tuesday, and a 75% chance of a 1/2% cut. (CEP)
1/2%. That’s the median rate cut forecast of 17 major economists surveyed by Bloomberg. (Bloomberg)
CIBC says “The Bank of Canada’s final half-point cut is fully priced in, leaving no room for an impact on government bond yields.” If CIBC is right and the 5-year bond yield doesn’t fall, fixed mortgage rates may have only two ways to go: sideways or up.
CIBC is forecasting an increase in prime rate by the end of this year.
“We expect the Bank of Canada to cut interest rates by 50 basis points…This would bring the overnight target rate to a record low of 0.50%, where we expect it to remain into 2010.” – TD economist, Dina Cover (TD)
Low core inflation "opens the door wide for another 50 basis-point (rate) cut…," says RBC analyst Matthew Strauss. (Globe)
InYourBestInterest.ca’s Hank Cunningham says the 2-year Canadian bond is a good indicator of future monetary policy. This chart suggests that 2-year bond traders don’t expect the BoC to cut much more. (Of course, there’s not much more to cut)

Rate Commentary

There is clear evidence that very low interest rates are not working to expand economic activity…You can cut rates to near zero, you can stimulate the domestic economy through fiscal policy, but you still need a rebound in the U.S. and European economies.” –- TD’s head economist, Doug Porter (Globe)
If the BoC lowers rates Tuesday, variable-rate mortgagors will be happy. Fixed-rate mortgagors with a long time to maturity won’t be as thrilled. People in fixed-rate mortgages generally have to pay IRD penalties to refinance. As a result, Kyle Green, a broker with Mortgage Alliance, says: “Each rate drop can add to your penalty to break your existing mortgage.”
“With rates this low, the major banks would be unlikely to pass on the full benefit of a 50 basis point cut to their customers.” -- Andrew Willis of the Globe & Mail
Who said prime minus was dead?! Cambrian Credit Union is advertising the country’s lowest 5-year variable rate at prime – 0.01%. Hooray! Too bad they primarily lend only in Manitoba.
“It would appear that the days of Prime - .90 are gone forever, but we may very well see Prime - .25 again.” – Mortgage Centre Broker, Peter Kinch
Variable-rate mortgage spreads (margins) have improved, but broker Marcus Tzaferis says banks “will not transfer the reduced cost associated with holding their VRM’s on to [consumers] until it becomes obvious that their margins on the VRM’s have been healthy for an extended period of time.” As a result, Tzaferis recommends a 1-year fixed mortgage until variables are available at better rates. “We believe that in 12 months the VRM market will be priced far more aggressively,” he says.
U.S. bonds “are one gigantic Ponzi scheme” says Peter Schiff of Euro Pacific Capital. Bonds are in a enormous bubble that Schiff says “ultimately will collapse.” If he’s even half right, U.S. yields may rise considerably. That would in turn push up Canadian yields. BNN via YouTube
Economic stimulus can take upwards of 1-1.5 years to work its way through the economy. It could therefore be 1-3 more quarters before the BoC’s rate cuts start reviving the Canadian economy. Only then might inflation make a comeback, and everyone knows what that means. Where there is smoke (inflation), fire (rate hikes) usually follows.