At last glance, 5-year bond rates were at 3.04%! That’s the lowest they’ve been since 1997 (the furthest back the Bank of Canada’s online database goes).
We’d be lying if we didn’t admit our surprise that bond traders consider Canada’s economic outlook so dire.
As for the bonds’ effect on mortgage rates, the fixed-5-year spread is now absolutely ENORMOUS at 4.23%. Historically it’s been around 2.50%. If this spread doesn’t narrow materially in the next week or two it’ll be amazing.
Discounted 5-year fixed rates should theoretically be about 4.14% right now, based on historical relationships. Instead they’re averaging about 5.79%!
Lenders have been slowly cutting their fixed rates in the last week or so, but the reductions are peanuts in relation to Canada’s falling bonds yields.
Last modified: April 25, 2014
“As for the bonds’ effect on mortgage rates, the fixed-5-year spread is now absolutely ENORMOUS at 4.23%. Historically it’s been around 2.50%. If this spread doesn’t narrow materially in the next week or two it’ll be amazing.”
I suggest that fixed rates will only drop marginally for several reasons.
– Banks have taken a bath on ABCP and subprime and they need to bolster their profits.
– Banks are paying more for mortgage funds. Investors are demanding more for GICs, corporate bank bonds and inter-bank loans.
– Banks foresee clouds on the horizon and higher rates offset foreclosures which will happen as job losses spread through Canada’s manufacturing and export markets.
Great points Roger and thanks for the comments. The fact that spreads have widened to this degree is largely based on the reasons you note. It would really be something if spreads remained this wide for long (and they might–who the heck knows). /Rob
I think the high risk spreads have a lot to do with the real estate bubble out west. High risk spreads have had a high amount of correlation with the end of previous housing cycles in Canada. House prices have doubled in the past 4 years in Calgary. Obviously household income, rent and GDP per capita has not increased to the same extent.
Calgary will easily surpass record levels of housing inventory within the next month, and year over year sales are down 40%. It’s going to take some time for the glut of housing to be absorbed, which I don’t think is going to happen at the current price point.
That’s my take on it (which has nothing to do with American ABCP losses).
http://calgaryrealestatemarketblog.files.wordpress.com/2008/02/risk_spreads-a_red_light_on_the_real_estate_market_large.png
Thanks for that link Radley77, I found that site very informative. I usually use median family income and compare that to average sale price and found many cities with very high ratios lately. Looks like my own city the average sales price is still around 2.5 times median salary . . . just nice and cozy. It’s too bad no one wants to live here :)
You might find this CBC report interesting:
Bank of Canada chops rate, but fixed mortgages don’t budge
http://www.cbc.ca/money/story/2008/03/05/mortgage.html
I sure hope these fixed rates come down a bit. I find it so frustrating that it hasn’t yet. While I was waiting for my house to be finished, I went through 2 rate guarantees – one at 5.60 and one at 5.80. Now the best i can get is 6.05, which isn’t bad, but I know it could be better. Oh well, I’ll just keep paying my variable 4.80 until something happens……
Radley, Very interesting post and link. We’ll run something on it shortly. Thanks!
Hi Hay, Did you use a mortgage planner to get that 6.05% rate, or did you go straight to the lender? What kind of mortgage is it?
Hi CM – 10 year basic fixed rate at PC Financial is currently 6.05.
Hi Hay, 6.05% is a solid rate for a 10-year. I hazard to guess that you won’t do a heck of a lot better than that… (as of today that is)
Great! Thanks for the insight/info. Would you recommend I lock it in at 6.05 or wait a little while longer to see if it comes down slightly? Like I said before, I had guarantees at 5.60 and 5.85 within the past year, so perhaps with all the movement we may see a slight decrease? or maybe I’m risking it too much?
Hi Hay, We generally try to steer away from rate predictions because the credit markets are largely random and flipping coins seems to work better. :)
That said, it’s clear that most people in our industry expect lower fixed rates in the next month or two.
I think we’re experiencing inflation right now….asset price inflation. I agree though that we could use a little inflation in goods prices/wages.