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Yields Plunge. Spreads Explode

The bond market continues to defy economists’ expectations (no news there). What is news, is that the 5-year yield has fallen to 2.30%, well below technical support at 2.40%.

Disappointing Canadian GDP, weaker growth in China, and rallying U.S treasuries are just the latest catalysts pushing down yields. The 5-year GoC is now back to its yield levels from May 2009.

More importantly, the spread between discounted 5-year fixed rates and the bond is now 2.09%—a 15-month high. (The 10-year average is 1.25)

Fixed-Bond-Spread(Click chart to enlarge)

Fat spreads mean fat profits for lenders. It also means that fixed rates are way higher than they should be, based on the cost of funds.  The last time the 5-year yield was at 2.30%, discounted five-year fixed rates were 3.75%. (The banks’ “special offer” discounted rates are 4.49% today.)

It wouldn’t be a stretch to expect more cuts to fixed rates soon…