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Bonds & Fixed Rates

Mortgage-Rates-and-Bond-YieldsFinancial 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.