When Will Fixed Rates Follow Bond Yields?

Bond-traders-2 5-year bonds rates sank to 3.36% today, their lowest yield since September 2005.  Meanwhile, 5-year fixed mortgages (which normally hinge off bond yields) are still quoted in the high 5’% range. 

We want to say that’s ludicrous and that fixed rates must start falling soon.  In our gut we expect them to.  But, this is the credit market, and anything goes when fear and uncertainty abound.  Spreads could theoretically keep expanding for months (keeping fixed rates high) until the subprime tidal wave passes.

In the meantime, variable rates seem pretty attractive–even at a chintzy discount of prime – 0.50%.  If you’re leaning towards a fixed, remember, you can always lock in a variable 6-12 months from now if fixed-rate spreads deflate and rates fall.

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Side Bar:  If you want a variable mortgage with the intention of converting to a fixed rate, first ask your mortgage planner what rate you’ll convert into.  Many big banks for example, will convert you into a rate that’s only 1% to 1.25% off their stratospheric posted rates.  Certain non-bank lenders are much more generous and let you convert into the lowest available broker rate.

  1. where does FirstLine fit? Supposedly I’ll be allowed to lock in to their floor rate, but is their Floor rate their actual lowest rate?

  2. There was an article on Bloomberg today saying about the same situation with commericial in the US:
    While the yield on 10-year Treasury notes fell 1.43 percentage points in the past three months to the lowest since 2003 following four interest rate cuts, the cost of borrowing for apartment buildings, offices, retail properties and hotels climbed as much as 1.25 percentage points, according to David McLain, principal and chief investment officer of Palisades Financial LLC, a private equity firm in Fort Lee, New Jersey.
    “The market is locked up right now because there’s a huge overhang of leveraged assets of every type, development deals that won’t meet projections made last year when things were rosy,” said David Tobin, a principal at New York-based Mission Capital Advisors LLC, which was involved in $5 billion of asset sales last year.

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