Yields Way Up

Canada’s 5-year bond closed Wednesday at 2.56%…after its biggest 2-day jump in eight months.

As most know, fixed mortgage rates are linked to bond yields.  Certain non-bank lenders have already reacted by raising rates 0.05% to 0.20%. 

While no big banks have moved yet, they may be getting anxious.  The cost of funds on 5-year money has soared roughly 30% (relatively, not absolutely) in the last month. 

The spread between banks’ advertised 5-year rate (3.95%) and bond yields is now down to 1.39% from about 2.00% a month ago.  When you factor in branch discretion (i.e., the additional discounts offered to some customers), the spread is often even narrower. 

It is difficult to imagine the Big 5 not raising rates if yields move higher.  A lender email from yesterday said: “rates are artificially low. Watch for fixed rate increases.”  Indeed, it seems some lenders are taking extra pains to avoid raising rates and giving up market share.