Financial Post (FP) ran a good story last week on the nuts and bolts of mortgage rates, called: Watch Bond Market For Rate Hike Clues

Here are a few of the takeaways:

• 5-year bond yields lead 5-year fixed mortgage rates
• Mortgage rates generally rise at a “one-to-one ratio” with bond yields, according to CIBC economist, Benjamin Tal.
• Bond yields change daily, but not mortgage rates. “Banks will move when they feel the increase is not a one-off thing,” says Tal. Otherwise, it would be too difficult for lenders to quote rates and manage marketing, internal budgeting, forecasting, etc.
• 5-year fixed mortgages (Canada’s most popular term) have historically been priced roughly 120 basis points above the 5-year bond yield.  Lately, however, rabid competition has driven spreads below 75 basis points, as in the case of CIBC’s recent cash-back special.
• FP says there is a 97% correlation between fixed rates and bond yields since 1980, which happens to match our findings from a few weeks ago. 
• “Rates adjust slightly more quickly upwards than downwards,” according to this Bank of Canada study. That’s partly because lenders don’t want to underprice long-term rate holds when rates are rising.
• The good old days (i.e.  March 2010) may be gone for quite a spell… 

“The rates we saw last week, I’d be surprised if we see those again maybe in our lifetime.” – Mortgage planner, Peter Kinch.

Last modified: April 28, 2014