The 5-year government yield (which influences 5-year fixed mortgage rates) closed at 1.998% on Monday, its lowest level in 17 months.
(Click chart to enlarge)
Friday's all-important job reports will determine if bonds hold the 2.00% level for the short-term. Employment expectations are pretty low, so it wouldn’t take much for a positive surprise.
If yields do stay below 2%, we may see discounted 5-year rates inch a bit lower. Lenders currently have plenty of spread (profit) in today’s typical 3.59% five-year fixed.
As usual, economic performance (both here and in the US) will influence bonds over the medium-term. BMO expects “Canadian bond yields to decline a bit further in the coming six months and then [turn higher] once the Bank of Canada resumes tightening.” (Bloomberg)
Bloomberg recently surveyed 14 major economists and their consensus is for the next BoC rate hike to come in 2nd quarter 2011. (Businessweek)
Reuters says the markets are pricing in an 89% probability of no change at the BoC’s next meeting on October 19.
TD’s latest forecast calls for a 5.50% prime rate and a 4.35% five-year yield by year-end 2014. That’s a 250 and 235 basis point increase respectively. Based on historical spreads, that suggests the following rates in four years:
5-year variable rates: 4.75%
5-year fixed rates: 5.60%.
Of course, we don’t have to remind most readers how big the margin of error is in long-range forecasts.