Check out how the yield on one-year overnight index swaps (OIS) has fallen out of bed over the last 11 days: click here for chart
The 1-year OIS trades in a multi-billion marketplace. Traders use it to bet on what the Bank of Canada’s key lending rate will average over the next 12 months.
Just over a week ago, the market was pricing in a “100%” chance of a rate hike by the BoC’s July 19 meeting.
Now, traders have pushed back that estimate, indicating they’re not totally confident of a rate hike until September 7.
Meanwhile, economists at Canada’s primary dealers expect an earlier rate increase. According to Reuters, their median call is for the BoC to lift rates at its May 31 meeting.
Expectations will likely get readjusted again this week. On Monday we get the latest data on November GDP. Then on Friday we get the most important stats of the month: the US & Canadian employment numbers. If these reports disappoint traders, it should hold the 5-year government yield below the key 2.60-2.65% level. That would keep fixed mortgage rates low for at least a bit longer.
Rob McLister, CMT
Last modified: April 25, 2014
Hi Rob Can you tell me how the percentage probability of an increase in the Bank Rate can be determined from the OIS?
Thanks.
Hi JW,
The probability is based on the prices of OIS contracts. Traders buy and sell these derivatives based on their expectations of the BoC’s policy rate.
The formula basically takes the price of OIS contracts straddling the BoC rate meeting in question, calculates the number of days to that meeting, and derives the probability using an algebraic function. I used to have an exact formula and will post it if I can ever find it. For now, you can find the probability itself at Reuters.com.
Cheers…
Thanks!
In my predictions for 2011, some of which I repeated in my response to one of your news articles earlier this year, I said that I believe that interest rates are not likely to rise much this year, at least not more than .5% for the Prime Rate, or .5% for the 5 year fixed mortgage rate.
There are many technical tools used to predict marginal interest changes, including changes in direction of change but I believe that the Bank of Canada is currently stuck in a situation where any significant change upwards in the prime rate could trigger a run on the Canadian dollar that could cause a major shift upwards in the valuation of the Canadian dollar vs the US dollar.
If the Canadian dollar were pushed up significantly over the next year this could have serious consequences for the Canadian economy, particularly manufacturing in Ontario. Basically, if the US economy doesn’t strenghten rates can’t go up much in Canada, no matter what else is driving us.
Of course inflation targets still drive interest rates, but is anyone really predicting major rises in inflation rates under the current economic malaise here in Canada? I don’t think so.
Just saying…. don’t count on interest rate increasing much during 2011.
Hi Donald, If you’re right you’ve got my vote for economist of the year! =)
Closing my house in March and have the following 3 options:
1) Port existing 5yrs closed-fixed mortgage at 3.5%. 3.5 years remaining in the term.
2) Pay about $1500 termination fee and switch to a new 5 yrs closed-fixed mortgage at 3.39%.
3) Pay about $1500 termination fee and switch to a new 5 yrs closed-var mortgage at 2.2%.
What do you guys think is the best option?
Thanks.
We currently have 2 years left on our 5 year open variable mortgage at prime -0.3 .
We have just received an offer to extend for 5 years (from mid February 2011 thru to mid February 2016) at an amended rate of prime – 0.7 . This amended mortgage would be a closed variable mortgage.
We have done quite well over the last 3 years and certainly count our blessings.
This amended mortgage would be beneficial (compared against our current mortgage) for the next two years but it is the last three that has me concerned. My crystal ball doesn’t let me see two years into the future.
Is it likely that we would be better off to lock in a fixed rate in two years than to continue floating at prime -0.7 for the three outer years of the proposed mortgage.
This offer from the bank was unsolicited….and it makes me wonder why they would offer this unless it were to their benefit.
Any opinion would be welcomed.
Thanks
Kevin
You dont mention the size of the mtge, or the equity in the property, or the relationship of payments to your income, all of which enters in to the risk associated with your decision.
Having said that, simplistically, by taking the new (fixed) rate, you will save approx $ 220 per yr in interest, or $ 770 for the next 3.5 yrs, when your existing would come due. As such, to pay the penalty, you are in effect (net) paying $ 730 to have a mortgage rate, at time of renewal at a rate, for the balance of term of one and half years at 3.40. Given today’s rate for 1 year at 2.35% and 2 year at 3.35%, , you are basically “paying” $ 730 to assure your rate stays the same for the last 1.5 years, as they are currently. Not a bad decision but not a huge benefit, when we are looking at only an extra 1.5 years. (personally, between those two options, I would keep the same rate and make a prepayment, immediately after closing of the $1,100, and you would find savings from the lower mtge balance in 3.5 years.
So the choice is more do you take variable vs fixed, with a maximum savings of $ 2,600 per year or $9,100 for 3.5 years. Less your penalty of $1,100 or net $ 8,000. Of course this assumes NO increase in prime over the 2.5 years, which is not going to happen, but at least you have some dollars to work with in the risk department. Again, if I were going to choose this option, I would however continue to make payments on my (new) mtge, as if I were on my existing mtge rate at 3.5% ( ie not the new 2.2% rate you would be getting) and this extra would provide further savings and or a hedge against higher rates. As a caution, when I say make payments at 3.5% on your 2.2% variable, you would still set up your payments based upon the 2.2%, and then set up an auto prepayment of the difference to get to the 3.5%. If you simply make the payments at the 3.5% rate and prime goes up, most lenders force payments to go up, regardless of the payment amortization that you started with. This way you would control the (total) payments, and not the lender.
A further question to ask your lender is the amortization that would be offered on all three options. Some lenders will require you, when porting, to maintain the same amortization, on the new mortgage, as exists on the present mortgage. For someone planning on taking a new mtge with a 35 year am, that option may only be available by paying the penalty and taking out a new mortgage. If that were an issue and you presently had an 18 year am remaining, for example, you might find the option of porting (with a higher mortgage amount, if needed), to put payments higher than you had planned.
Finally, in the context of the various interest rates being offered to you, you can be confident that your choice, whatever you choose, will be a win for you. Having the luxury to choose products between rates under 4% is a nice “problem