Massive Decline in Bond Yields

Bond-yieldsCanada’s 5-year bond yield had a huge drop today—it’s largest 1-day fall since September.

The yield on the 5-year Canada now stands at 1.70%, a 2-month low.

The unusual move came after the U.S. Fed announced it would buy over $1 trillion of fixed-income securities in the open market.  Analysts say that is tantamount to the Fed admitting there is no bottom in sight for the American economy.  (More on this at CEP)

Bond traders–who put their money where their mouth is when predicting rates–never saw this coming.

Many were caught short and had to cover in panic fashion.  Yields dropped like a rock as a result.

This, of course, is great news for people on the hunt for a good fixed mortgage rate.  (Bond yields generally lead fixed rates.)  So far we’ve heard of two lenders talk of lowering their rates.  We’ll have to wait and see what happens over the next 3-4 days.

  1. I am early renewing my mortgage (3 month interest break fee). I have an offer of 4.1% for 5 -year fixed received 2 days ago from my current bank/mortgage holder. Now bond yields drop 0.18% in a single day. Wonder if I should go back to the bargaining table….

  2. It will be interesting to see how low the big banks’ “special” (advertised but not true “posted”) rates will go. Last week it was 4.25% for a 5-year fixed-rate mortgage, with banks like ING hitting 4.15% recently and other institutions even slightly lower. In the coming days, will we merely see other big banks matching that 4.25% target, or could we finally see the 4% barrier broken by a big bank (for an advertised 5-year fixed rate)?

  3. Mustahpa,
    I do agree that the lower rates do make it appealing to move your mortgage but I’m sure you would concur that it depends on your penalty to break your current mortgage. If you have a fixed rate, closed mortgage then you are likely in for a shock when you ask your existing lender for your penalty.
    If you move, your interest in each new payment may be lower but that penalty paid to leave your lender is a big chunk of interest all at once and since most people will have to capitalize the penalty into their new mortgage they are now amortizing that chunk of interest. Further, unless they are willing to keep their payment similar to what they are paying now, they may end up being further behind with paying down their mortgage principal.
    Everyone’s situation is different and moving your mortgage for the sake of a lower rate may not always make sense, as counter-intuitive as that may sound.

  4. Decision Time, I am in the same boat, paying 5.7% now and looking at paying my penalties to go down for a 5-years of 4.10%. However, I don’t know how long should I wait for this rate to drop further. Actually, I was looking at getting into a 5-y variable for 3.10%, wait for few months before I lock it in. What do you guys think?

  5. MortgageSeeker,
    There are so many questions that any good mortgage planner should be asking you to help you to determine the best course of action. First in my mind would be, what is your goal in breaking your mortgage? Are you needing to lower your payments due to a recently reduced household income? Are you looking to consolidate debts? Is it simply the appeal of the lower rate?
    After that, in order to do an accurate comparison, they would need to know more information about your current mortgage. For example, your penalty, your current balance, the time remaining in your term.
    As for when is the best time to lock-in, any advice you get is going to be an educated guess. No one knows what the future holds. This particular blog post touches on the uncertainty: “Bond traders–who put their money where their mouth is when predicting rates–never saw this coming“.
    My advice, find a good mortgage planner.

  6. About the penalty. I am with Firstline now. Two weeks ago, I was told my penalty was $2500. Yesterday, I called again, the penalty became 5500, they did not give me the reason.
    Does anybody know why?

  7. Hi TD,
    It could be because rates have fallen. When that happens the amount of potential interest your lender loses by you breaking your mortgage goes up–and so does your penalty. This is the irritating reality of IRD penalties.
    Another possibility is that the “reinvestment rate” may have dropped to a lesser term. That can result in a big difference in penalty even if rates do not change.
    I’ll give you an example provided by one of our lender reps. Suppose you refinance today and have 3.7 years left on your term, your lender would probably use the current 4-year rate to calculate your penalty. But in 2 months, you would have 3.5 years left which means the 3-year rate would be used. If the 3-year rate was higher than the 4-year rate, this could result in a large difference in penalty.
    In case it helps, here is an IRD Penalty Calculator you can use to estimate the effect of rate changes on your penalty. This provides a very rough estimate so always get the exact number from your lender.
    Cheers,
    -Robert

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