Canada’s 5-year government bond yield has plunged yet again. As of yesterday it was down to 1.67%. Twelve months ago it was almost four percent!
Meanwhile, mortgage spreads are as stubborn as ever. The difference between 5-year posted mortgage rates and the 5-year bond yield is now a mind-blowing 5.08%. (Fixed mortgage rates are normally linked closely to bond yields.)
That spread is more than double normal, and higher than almost anything we see on record—save for a higher spread in 1981—and our data goes back 30 years.
What does it all mean? It means Canada’s mortgage market is dysfunctional–still. It means banks are unwilling or “unable” to pass on interest rate cuts.
Based on historical norms–which naturally don’t apply in today’s market–5-year discounted fixed rates should be near 3.00%. Instead, banks are keeping them in the high 4% range.
Even if investors theoretically demanded fat 1.00% liquidity premiums above bond yields (to compensate for the “risk” of investing in fully insured Canadian mortgages), 5-year fixed mortgage rates should still be at least 3/4% below where they are now.
So when will lenders start delivering better fixed rate discounts? Hopefully soon, but few really know—and fewer want to tell.