Yields Way Up

Canada’s 5-year bond closed Wednesday at 2.56%…after its biggest 2-day jump in eight months.

As most know, fixed mortgage rates are linked to bond yields.  Certain non-bank lenders have already reacted by raising rates 0.05% to 0.20%.

5-year_bond_yields

While no big banks have moved yet, they may be getting anxious.  The cost of funds on 5-year money has soared roughly 30% (relatively, not absolutely) in the last month.

The spread between banks’ advertised 5-year rate (3.95%) and bond yields is now down to 1.39% from about 2.00% a month ago.  When you factor in branch discretion (i.e., the additional discounts offered to some customers), the spread is often even narrower.

It is difficult to imagine the Big 5 not raising rates if yields move higher.  A lender email from yesterday said: “rates are artificially low. Watch for fixed rate increases.”  Indeed, it seems some lenders are taking extra pains to avoid raising rates and giving up market share.

  1. If the stock market starts going sideways, or gives up some ground, can’t the 5 year yield go back down?

  2. Absolutely Shawn. Anything can happen. Given all the factors, the path of least resistance for bond yields appears up. But that can change, and it can also take a while for mortgage rates to follow. But we haven’t seen yield increases like this in a while and it is indicative of market change, at least in the short term. Cheers, – rob

  3. Why are the yield going up when I thought both governments are doing quantitative easing and buying up government bonds to drive up the prices. Shouldn’t bond yield be lowered?

  4. That is what they are attempting to do…but the market is more powerful than any government. Short of buying all of it, the only thing the government can do is small temporary moves to yields. They should get out of the way and let the market take care of itself.

  5. As far as I know, the Bank of Canada has not engaged in quantitative easing. Many central banks have, but not the BoC.
    Carney said the BoC would begin doing so only as a last resort, and only to the extent that it is needed.

  6. Just wanted to say how informative this site is and had a quick question:
    I am just starting the last year of my five year fixed rate mortgage which is at 4.74. My bank has informed me that the penalty to break and renew would be approx. $2,400 and they would offer me 3.58 for five years. I can early renew with no penalty in February and i am wondering what your advice would be?

  7. Hi Dianne,
    Thanks for the nice feedback. Really appreciate it.
    Based on rate alone, 3.58% is below-market for a 5-year rate–so that’s good. The penalty and mortgage type are worth discussing however. What I’d recommend is to give a mortgage planner a call, or call me if you like. It will help you determine if there are any better alternatives that are more cost effective overall.
    Cheers,
    -rob

  8. it was —— that offered me that rate after I showed them an ad in the local newspaper that was offering 3.59
    [Sorry Diane. Rates must be substantiated (via a link, ad, etc.). We’ve had a problem with lenders and brokers posting below-market rates to generate phone calls]

  9. ————-
    They seem to have 5-year fixed rates at 3.54%
    [Edited. Please feel free to post any verifiable lender quotes. However, we ask that broker quotes are not posted. Otherwise the site will be overrun with spam. Thanks for your understanding. – Elizabeth]

  10. sorry about that! – thanks for clarifying what should be posted and thanks again for the great site :)

  11. I’m stuck in a 5 yr fixed rate at 5.7%. My mortgage broker told me it would cost $15,000 or thereabouts to break the contract because of interest rate differential. Seems a complete ripoff. Is there anything I can do or am I stuck paying high rate of interest for the next 3.5 years and then probably face higher rates once at that time.
    Thanks,
    A frustrated mortgage owner.

  12. Expecting the rates may go down further, wanted open variable, but seeing the low rate of 3.5%, looks like it’s better to go fixed for peace of mind. Thanks.

  13. I’m considering roughly the same choice… 3.60% 5-year fixed vs Prime+0.6 variable open.
    Even though I can’t see Prime rising rapidly in the near future. I don’t think 5-year fixed rates can possibly stay this low (the gap between 5-year Canadian bonds and 5-year fixed mortgage rates is incredibly low right now and has to correct itself soon.

  14. Dave I don’t see how rates can go any lower. Short-term rates are already near 0% and long terms rates are going up as the story here states.

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