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Dramatic Sentiment Shift

The air of concern about a North American economic slowdown has grown thick enough to slice. Nowhere is that more evident than in the U.S. treasury market, where 2-year yields have collapsed to an all-time low of 0.4892%.

What a stark contrast to just four short months ago, when Canadian headlines cheered the great economic rebound of 2010.

Now the bond market is acting like the U.S. and China are shutting down their economies.

Of course, when yields plunge there is an upside:  lower mortgage rates.

Highly discounted 5-year fixed rates are now in the 3.89% range, less than 1/2 point from the lowest we can remember. They’ll probably go even lower in the short term.

Fixed-Variable-Mortgage-Spread Moreover, the percentage spread between discounted 5-year fixed and variable rates has tumbled over 110 basis points in the last few months. That’s reduced the variable-rate advantage markedly.

In fact, our models show that fixed and variable rates are once again neck and neck in terms of 5-year hypothetical interest cost. That’s assuming you buy into the rate increase projections of major economists (i.e., up 2.00-2.50% in the next 18-24 months).

That said, the 5-year fixed isn’t the only term benefiting from the recent plunge in yields.  There’s tremendous value in 1- and 3-year terms as well.  Have your mortgage planner run some amortization simulations to see which term might work best for you.