Big Bounce in Bond Yields

5-year bond rates have spiked up quite a bit in the last 12 days.  The 5-year Canada yield has jumped 4/10% from its long-term low of 1.52% set on January 14.

Part of this is due to unexpectedly positive economic news, part is a reaction to the increasing supply of bonds on the horizon, and part is bond traders taking profits after one of the biggest bond rallies in recent memory.

The move has many now asking if yields are at some kind of bottom.

Research suggests that rate prediction is futile, but people are still taking note because of the correlation (historically anyway) between bond yields and fixed mortgage rates.

In absolute terms, bond yields have come down A LOT.  Check out this chart of the past few years.  The y-axis on the left is the percentage yield of the 5-year government bond.

5-Year-Bond-Yields

Longer-term, bond yields have come down even more.  This chart of 5-year yields over the last decade shows just how far we’ve dropped.

5-year-canadian-bond-yields-last-10-years

A lot of trader-types think yields could retrace (i.e.  go up) at least a point or more, especially if the economy appears to be recovering faster than expected.  (Again, take that for what it’s worth–we don’t predict.)

If you’re a mortgage shopper worried about the potential of that happening, then today’s fixed rates (under 4.50% on a 5-year and under 4.00% on a 3-year) look pretty appetizing.  Fixed mortgage rates are basically at, or near, all-time lows.  Meanwhile variable-rate mortgages are hovering around 3.75% to 4.00%.

That minimal difference between fixed and variable rates seems to have captured homeowners’ attention.  We, for one, have seen a noticeable increase in homeowners wanting to lock in as of late.

  1. Seems like maybe we are getting ahead of ourselves. Economy recovery? I am not sure that we have experienced the full effects of this recession.
    This sounds like a knee jerk reaction to me. I think the spread between long term bonds and fixed rate mortgages is still fairly wide? Open to hearing another opinion though.

  2. Peteyboy.
    Governments are greatly overbought. Yields must correct at some point and even knee jerks can drive up rates a fair amount. Spreads haven’t improved enough to absorb all the impact of rising yields.

  3. Greg
    Your talking to a open minded opinionated newbie. I welcome your comment. However I am not sure If I understand your statement ” Governments are greatly overbought.”

  4. With a 5 year fixed rate available at 3.99% (Valueland), those with average incomes or tight finances should seriously consider the stability of a fixed rate.

  5. With rates below 4.75 (the 10-year average Variable Rate) EVERYONE should consider locking-in.
    VR mortgages pay-off 88% of the time, but even Moshe Milevsky (the guy who demonstrated the advantages of VRM) admits that fixed rates pay off 12% of the time: both when variables rates rise OR when fixed rates drop to low levels.
    This would seem to be one of the times when the fixed rates make sense.
    No?

  6. This discussion of fixed vs. variable leads to something I’ve been wondering about: What is the difference in the level of compensation from the lender to the planner between variable and fixed-rate mortgages? My hunch is that planners get more for delivering fixed-rate business than variable.

  7. Teddy94
    I understand your reasoning with regard to existing fixed rates. However their are some people who had pre-existing variable rates that are now paying 2.6 and less. Even if these rates last for another 6-12 months is it not worth riding it out? I realize there is alot more room for a rate increase than decrease. What I am trying to say is are you suggesting that people with the above interest rates should lock in?
    I welcome opinions.

  8. However their are some people who had pre-existing variable rates that are now paying 2.6 and less. Even if these rates last for another 6-12 months is it not worth riding it out?
    I’m not sure it is worth it. It depends, of course, how high it bounces on the other end and for how long.
    Over the last 10 years, the average discounted (Prime-0.6) VR has been 4.75. If you think the over the next 5 years your discounted Variable rate will average less than this, then it would make sense to keep it.
    But, the odds would seem to be against this possibility — historically speaking anyway.
    Think of it this way, if my VR stays at 2.4 for the whole year (is this likely?) but then the remaining 4 years it is higher than 4.5 (is this likely?), I would have been better to take the fixed rate now, despite the fact that at the beginning I’d be paying more. Over the long run, I pay less.
    Of course this isn’t strictly true, because every dollar of extra principle you pay down at the beginning saves you money down the line (assuming you are using all of the extra money to pound the principle), but that gets pretty difficult to model in a universe of relatively unpredictable rate changese.

  9. In short, I don’t know what the answer is either; but I think a pretty persuasive case can porobably be made that this might be one of those rare situations where it makes sense to jump out of that low VR and into a slightly higher (but still historically low) fixed rate.
    Thoughts?

  10. Previewing your Comment
    “With rates below 4.75 (the 10-year average Variable Rate) EVERYONE should consider locking-in.”
    Hmmm…
    The aforementioned 10 year avr VR took place during a period of excess spending which is directly responsible for the mess we are now in.
    This present mess is historically unequalled – ever!
    I don’t know whether or not someone should lock in. But I DO know that it is beyond hubris to use what happened over the past 10 years as any sort of proxy of what will happen over the next 10 years.

  11. Hey Teddy, great posts.
    I am one of those people with a great VR @ 2.25% right now. I have been debating whether to lock-in 5yrs year @ 4.49% with my bank.
    With my current large mortgage remaining, this difference of 2.24% between VR and Fixed is currently saving me over $600 on interest expenses per month. This is a LOT of money for interest savings. It’s a difficult decision for me to make the jump over to Fixed right now. I am having a tough time trying to figure out which option is best over the 5 yr term. Of course there are a lot of unknown variables at work, which makes the decision making process even tougher.

  12. Agree with DH, the decision is real hard to make that switch. In the pass 10 years, the only time prime climbs up 2% or more took more than 2 years after it hit the bottom. From the ‘trend’, it doesn’t appears that we hit the bottom of the rates yet. Can’t go wrong with 4.49% for 5 years for sure, unless at the end of 5 years you’re force to renew at 7% and up. I’m gonna ride the wave and hopefully the spike won’t be higher than 2% in the next 2 years (how likely? Its a gambling game). I think it make more sense to lock when the rate starting go up rather than to lock when rate are on its way down. Logically speaking without taking human emotion into factor…

  13. Hmmm…The aforementioned 10 year avr VR took place during a period of excess spending which is directly responsible for the mess we are now in.
    This present mess is historically unequalled – ever!

    Agreed. But that argument cuts both ways. We can look and say that, historically speaking, interest rates don’t normally jump more than 2%, but like you say, this is an historically unequalled mess . . .

  14. And I’m not entirely convinced that “we” have learned the lesson of the last ten years such that the next ten years will see appreciably different monetary policy, spending habits, etc.

  15. Teddy94
    I really appreciate the comments. I agree that the lower VR will not last for 3-5 years (maybe even 6 months), however I do know if I had started my mortgage with a VR I would be at least 3 years closer to being mortgage free. I am not sure what to do. Likely the answer is whereever your comfort level is. Tight on finances or just starting out ” lock in and don’t worry”. Closer to the end of your mortgage with an abundance of money, let it ride!

  16. Even at 2%, the Fixed probably should have been lower than 4.49%… Wasn’t that the trend? Not sure. Ofcourse, trend is prediction and we can’t predict anything because the Banks will never lower anything like they should…

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