Rising Bond Yields Pressuring Fixed Rates

Rising-Mortgage-Rate-RiskThe 5-year government yield (which leads 5-year fixed mortgage rates) pierced 2.80% today.

It’s risen almost 35 basis points in two weeks.

That’s squeezed gross lender margins on deeply-discounted five-year rates to near 1.00% (1.20% can be considered “normal”).

As a result, ultra-low fixed rates are in danger of ticking 10+ basis points higher, especially if this yield trend continues.

The 5-year rates we’re seeing in the market seem like aberrations in light of all this.  Depending on what province you live in, there are brokers and/or lenders advertising 3.54% to 3.79% on 5-year money. Those rates are gifts from the heavens. They may not last long (in the short term at least) unless yields drop soon.

Keep in mind, these perspectives refer to fixed rates in the short term. This says nothing about what rates will do further out, and is not a recommendation to lock in (if you’re in a variable). For advice of that sort, the best bet is always to call your mortgage advisor and ask for guidance based on your specific circumstances.

Rob McLister, CMT

  1. 5-yr GOC Bond yield reached 2.813% (http://www.bloomberg.com/apps/quote?ticker=GCAN5YR:IND) in early March and only got interrupted & retreated because (anyone paying attention?) of the disaster in Japan. So the current rate upward march is only along trend commencing late October last year. As the rest of the world is showing signs of economic recovery, this trend will only continue and may get slowed down in the very short term because of unforeseen world events. The DOW has already reached its pre-Lehman Bros collapse level in 2008. Smart money will continue to move away from debt to equity. The pundits are only talking about when the BOC will raise its interest rate. The current election is delaying Bank rate increases, but what has that got to do with the bulk of the mortgage market? Nothing! My crystal ball says the rise in the Cdn $ will continue to moderate any Bank rate increases, but increases they will. So, consumers! Start planning and make sure you are in a stable employment situation. My other crystal ball says consumer spending will slow and slow dramatically in the next few years. However, that will be balanced by corporate investment increase (partly due to the strong dollar and partly due to interest rates getting back to normal levels, thus increasing opportunity costs. All these talks about short cycle interest rate behaviour are totally misguided and meaningless. With little or no gain in property values in the coming years, refinancing and ETO for some consumers will become impossible especially when they started out with little equity in the first place. What your credit, people!

  2. Hi MK, Glad to see you haven’t thrown out your crystal ball. In response to your spirited opinion against “short cycle” rate discussions: The “meaning” of short-term interest rate commentary is merely to advise of potential rate changes. That tends to be of relevance to people considering a fixed rate in the near-term, and to industry folks in general.
    All the best…

  3. MK – Get spellcheck..you’d sound more professional with it rather than a person spewing out generic knowledge

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