Plunging Confidence Drives Down Rates

Jumper Nothing spooks financial markets like uncertainty and risk, and it shows in today’s bond yields

The 5-year yield (which influences 5-year fixed mortgage rates) is down strikingly in the last 30 days. It dropped another 12 basis points today.

In less than a month, yields have tumbled 62 bps. That’s the biggest one-month drop since December 2008.

A glut of negativity is herding investors into the safety of bonds (and driving down yields), including:

To get a sense for the perceived financial system risk out there, take a look at LIBOR. LIBOR is the rate at which banks lend unsecured funds to each other. It’s risen 29 of the last 30 days.

The good news definitely seems sparse beyond Canada’s borders, but fear is often fleeting. While the current market environment is grim, sentiment may be considerably different next week.

Today’s concerns must also be set against a strong rebound in Canadian economic performance. When the problems above are resolved, the BoC will likely resume focus on Canada’s robust domestic indicators.

Going forward…

  • Most analysts still expect a rate hike come June or July. See: June Rate Hike Still Likely…
  • However, traders have removed some of their bets for a Bank of Canada move on June 1. Financial futures peg the probability of a June hike at roughly 50/50.
  • Fixed rates may drop a bit more. This morning, RBC cut its 5-year rate by 11 bps. TD has followed. Other banks should be right behind.
  • The banks' new 5-year fixed "special offer" rate is 4.59%. Expect a minimum of 10-20 basis points off that if you're well qualified.
  • Barring further changes, the new mortgage qualifying rate will be 5.99%, effective May 31.


Sidebar:  The last time 5-year yields were this low was March 5. Posted 5-year fixed rates were 5.39% at the time. Today, they’re 5.99%—60 bps more! Granted, there’s more of a risk and rate-hike premium built into today’s rates, but 60 basis points seems extreme.

  1. My mortgage closes in August, i am now watching bond rates closely in hope that they drop so hopefully mortgages rates follow. I feel like a villain in doing so. hoping the economy as a whole does badly so that i can profit.

  2. IMO this may be people’s last chance to get a good deal on a long term mortgage. This is probably just a short term dip. After the EU gets its act together rates should go back up.

  3. How do you know the EU will get its act together? But then again they might? Who is right, who is wrong? FEAR, UNCERTAINTY. These seem to be the over riding themes in the market today. LOGIC is never used though.

  4. well, so much the for great Canadian Bank rate rise of 2010! Ha! Maybe they’ll eek out a .25 basis point raise in July (or even in June if they’re daring) but I dont think it will last long. The world is quite obviously lapsing right back into severe recession. Markets are crashing all over the place. How can anyone expect Europe to ‘fix’ the massive debt problems many of its member countries have in a few weeks or months? It will likely play out over a much longer period.
    In 12 months time, I would expect rates to be LOWER than they are today, despite all the wailing a gnashing of teeth of the so-called Economic Experts here in Canada.

  5. Hey Frank,
    Read my comments on Could $100 Oil Spike Mortgage Rates? The interest rate story goes back three years…down. New lower oil prices means no recovery for a number of years.
    The US is in the same spot as Europe. Next big shoe to drop is real estate in Canada.
    So you will get a lower interest rate in August with a lower house value for years to come.

  6. The definition of insanity: Making a long-term prediction about something that is random and believing you are right.
    Rates one year from now are ruled by chance. If you ever doubted how chance plays a part in rates, this European mess should set the record straight. No one foresaw it and no one could have predicted it.
    If you were right on your past rate calls it was ONLY because you were lucky. If you believe otherwise then your opinion of yourself is way higher than it should be.
    Nothing personal Brian (and others).

  7. I am not a Frank, but I want to be frank about what I say :-)
    Frank, I hope agree that there is some science behind economic forecasts (when made by economists !)

  8. ” …this European mess should set the record straight. No one foresaw it and no one could have predicted it.”
    What the hell?
    MANY people saw it coming, including the poster “Al R” who used it to support his “interest rates won’t rise as quickly as everyone says” thesis.
    Al was probably stealing the idea from Mish’s blog or the Calculated Risk blog or Karl Denninger’s blog. Basically the same cast of characters who predicted the 2008 Real Estate and Banking System “perfect storm that no one saw coming”.
    Just because MSNBC and GlobeInvestor have men with economist or central banker credentials saying that things are under control doesn’t make it so. Spain had a failed bond auction on Tuesday which wouldn’t be that interesting except for the fact that they were trying to raise their share of the bailout money needed for Greece.
    This thing has a long way to go. I don’t predict outright collapse simply because there are still a lot of able bodied tax-payers on this planet left to fund bailouts and a well established mechanism for transferring our wealth around the globe. But a tremendous amount of financial sausage still needs to be hidden somewhere and it will take many years to play out.
    The exception, I think, is if the bond vigilantes set their sites on the US. Then we will have exploding interest rates AND deflation (instead of the recovery we keep hearing is ongoing).

  9. Au contraire, I think that little voice in the back of every investor’s head is nagging logic into his/her decision-making process, manifesting itself in the deterioration in confidence we are seeing in the markets. Why? Because the system is in terrible shape globally and the fundamentals portend a worsening situation.

  10. Frank,
    I am just looking at the raw data. Like I have for years. The economy is not good, so interest rates are not likely to go up.
    If I was that lucky I’d play the 6/49 numbers.
    Here is what one of the the experts said three years ago…
    October 26, 2007
    Globe Says Lock In
    Lock-in-Mortgage Rob Carrick from the Globe & Mail is ringing the alarm. With mortgage rates at 6-year highs and shrinking variable-rate discounts, he says it’s time to lock in now.

  11. “Here is what one of the the experts said three years ago…”
    Often times, we don’t know everything we need to know in order to make good decisions.
    I think that in the absence of other information, doing the opposite of what the big players tell you to do is generally a good strategy.
    Goldman Sachs issued 9 public trading recommendations last quarter. 7 of them lost money for those who followed the recommendations. And yet GS made money every single trading day.
    Good times…

  12. Who says the economy is not good? The Bank of Canada says we are going to grow 3.8% this year and 3.7% in 2011. Just because a bunch of countries have piles of debt, so what, they always did and always will, you will never pay off all the debt. Debt = money. If you could somehow pay off all the debt then money would cease to exist and we would all be in big trouble. I see employers starting to hire again around here, Cami in Ingersoll is hiring 300 new auto workers to take on the equinox/acadia platform, General dynamics land systems is taking on more people, cars are being sold, parts are shipping, trucking to US is full tilt on the 401, and commodities to china and india are still a go. So even though the great pessimists are saying europe is going to drag us to hell, I say no, they will fix their problem, we will etch along and the sun will come up tommorow. As far as interest rates, there is no reason to be kept at emergency levels anymore. AUS has raised theirs several times already and it is time for us to take the first step.

  13. You say “MANY people saw it coming”
    That is so far from the truth it should be a crime for you to print it.
    Show us historical links that prove these “sources” you cite predicted the Greece meltdown.
    Without proof your post is just hindsight chatter.
    If the Bank of Canada couldn’t predict it, no one could. The Bank of Canada has better data sources than anyone, but even they don’t have a crystal ball.

  14. “Show us historical links that prove these “sources” you cite predicted the Greece meltdown.”
    Yeah, like I’m here to take abuse *and* do your homework for you besides.
    Here are some additional names if you ever decide to look beyond your blind worship of central bankers and start thinking for yourself.
    Nouriel Roubini
    Marc Faber
    Meredith Whitney <- this one sees so many things coming she has a long history of receiving death threats from the "smart people"...

  15. I know the names you’re dropping and none of these people predicted the Greek debt situation as you claim.
    Even if one made comments in passing, no country in their right mind will set policy based on a few unsubstantiated analyst opinions. Opinions are wrong just as much as they are right.
    Why do you think the EU let Greece into the union? The EU itself was duped and never saw this coming.
    The point stands that market aberrations cannot be seen in advance unless you’re on the inside (like Greece’s finance minister). If these things could be predicted, they would be avoided. The warning signs also would have been factored into the $82 trillion dollar global bond market long ago.
    If you take just one thing away from this conversation let it be this. If information is of any value whatsoever, it will be priced into the markets. The fact that stock and bond markets were unaffected until recently proves that the crisis was unforeseeable.

  16. Quote: “The world is quite obviously lapsing right back into severe recession.”
    I would disagree. The facts don’t support this. GDP is growing in most developed nations. Be careful not to extrapolate the “PIGS” problems to the rest of the world.
    Interest rate forwards indicate rates will rise 4% by 2013. I would side more with that indicator than any other because it’s backed by real money instead of casual opinion.

  17. As I said, I’m not here to correct the the fraud that was perpetrated on you by your “educators”. If you want to know whats happening next, the names I have provided will get you started.
    I’m sorry that the “efficient market” theories you learned in econ 101 aren’t true. It hurt me to learn it too to be honest.
    Unfortunately the money system doesn’t work in anything like the way we were all led to believe in school. Most of the “unexplainable” things going on in the world become much more understandable once you start to “get it”. Murry Rothbard wrote some (freely available online) books about how the banking system operates and anyone with reasonable intelligence can grasp the content.
    What the previously mentioned people failed to do was get the timing. For a year they wrote repeatedly about how Greece is clearly insolvent and yet it wasn’t until May that things really started to unravel.
    They also can’t tell you whether its Spain or Portugal that will go under next. But they both will. Of course there will be bailouts paid for by you and I so the world won’t end.
    But it will *feel* like it’s ending for a while. It’s all part of the “pay us or else” theater, run by the central bankers and their private owners.

  18. Brian,
    Again nothing personal, but you can look at raw number until the cows come home. It’s meaningless. Raw numbers can’t portend China’s GDP in two years, Canada’s inflation in two years, or any number of crises that may arise.
    Save your time and stick to the 649 – where being lucky pays better.

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