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What Next?

where-is-the-bottom-in-mortgage-rates There’s been big changes to fixed mortgage rates in the last 24 hours.  As a result of this and the BoC announcement, mortgage professionals are probably getting more calls today than they have in weeks.

Mortgagors and mortgage shoppers alike are anxious to know:  “What now?”  “When should I lock in?”  “Where is the bottom in rates?”

The latter is the most common question we seem to be getting.  In answering it, we’re no better off than anyone else at predicting where rates will go next.  Almost anything seems possible in the credit market these days. We’ve seen U.S. treasuries trade at negative yields and Japan cut their policy rate to 0.1%.

Despite this and the outside possibility of Canada’s overnight rate going to 0% (this is not a prediction), we feel safe in saying that prime rate and fixed rates are not destined for anywhere near 0%, or 1%.

Banks have already shown hesitancy to lower prime and funding cost are still above normal. Therefore, a 0% overnight rate might bring prime down maybe 0.50% to 1.00% more, tops (as a very rough guess). Most economists seem to predict 1/2% more max.

Whatever the case, consider your probabilities of success by basing an interest rate strategy on the “hope” that rates fall further. If billion dollar bond fund managers can’t consistently predict turning points in rates, what chance do normal folks have?


Sidebar:  In case anyone’s interested, here’s an empirical study of how bond fund managers do against their benchmarks. Quote from the study:  “Among fixed income funds, indices outperformed twelve of thirteen categories over a five-year horizon.”  It’s tough to predict rates!

(Thanks to Seeking Alpha for the link on this study.)