Essentially it’s because fixed rates are based on bond prices and variable rates hinge off of prime rate.
Contrary to intuition, prime rate and 5-year bond yields are not closely correlated. The correlation between the two is only 72% (OK but not great for financial time series). That’s because these two rates come from different markets: the market for 5-year funds and the market for short term bonds.
Compare that to the correlation between 5-year bond yields and fixed mortgage rates. That correlation is 95% (very high). The reason is, financial institutions use the 5-year bond as a benchmark for determining cost of funds for 5-year mortgages.
(Contact us for citations of the statistics sources.)
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