The world’s most prominent fixed income investor, Bill Gross, has predicted the end of the 30-year bull market in bonds.
His call may be early and he is but one man, but bond traders took note as they sold off treasuries.
From a mortgage perspective, events that impact bonds can be viewed in two separate timeframes: the short term and the long-term.
The long-term impact is near-impossible to judge because random events often intervene. Currently, the bond market is worried about the ballooning U.S. debt burden, as well as a U.S. Fed that’s printing hundreds of billions of inflationary dollars to kickstart the American economy. (Gross called U.S. debt and monetary policy a “Ponzi Scheme” earlier today.) But that doesn’t mean something else—like weak output—won’t counterbalance this inflationary phenomenon. See BMO’s take.
The above ties in with Canadian mortgages because of how tightly-correlated US yields are to Canadian yields. As bonds sell off south of the border, Canadian yields typically rise, as least for a while. This lifts fixed mortgage rates.
In the short-term, technical factors will drive trading to a large degree. Market technicians believe bonds are “overbought” and displaying a reversal pattern. The long-term concerns mentioned above, and better-than-expected economic numbers (like consumer confidence), have been a catalyst for this reversal.
Whether the climb in yields continues is yet to be seen. The 5-year yield hit a 1-month high today. It’s up 22 basis points from last Wednesday’s low. If it jumps another 10 basis points or so, deep-discount fixed rates could reverse higher.
This reversal is immediately relevant to people that need to lock in a rate in the next 30-60 days. Barring another Greek-style default panic (which is making renewed headlines again in case you haven’t seen) the odds are fairly good that yields won’t drop much lower in the near term.
For that reason, if you need a fixed rate approval in the next 1-2 months, it would be logical to get a rate guarantee sooner, rather than later.
Last modified: April 26, 2014
Is it possible to have an environment in which fixed rates rise due to bond yields, but the bank rate (and variable rate mortgages) remains stable due to weak inflation and GDP?
Another scare tactic to get more fools to lock into fixed rates. Variable rates are still much lower and rates would have to rise dramatically to make a difference. People are paid by the big banks to scare us all into locking into fixed rates that are higher and more expensive in the long term.
“informed”
you’re wearing your tin foil hat too tight.
Where do I sign up for this job and how much do they pay?
I agree with informed, a rise to 2.05 is hardly a rise at all, infact its currently back at 1.98
I have to admit I have no inkling of where bond yields are going. The feeling I get however is that bonds are underestimating the future strength of our economy. Everyone is lumping us in with the US and paying no attention to Canada’s expanding trade with developing economies. I just get the sense that things are not as bad as bond prices would indicate.
but our economy has cooled off considerably in recent months and in the short term it would seem our own economic growth will be lackluster!
Bonds are one economic measure. Currency strength is another and although Canada might be expanding trade internationally, no country will de-throne the US as Canada’s #1 trading partner anytime soon so we will continue to be attached to the US umbilical cord.
Hi Jack, That certainly is possible, at least for some period of time. Over the long term, 5-year yields and prime tend to move in the same direction but shorter-term (3-9 months) they can deviate considerably.
Cheers,
Rob
My husband found this site by accident and I’m glad he did. After reading this article we locked in right before rates went up. We got 3.39% for five years and we couldn’t be happier. Thank you!