A 180 Degree Change in Rate Views

46% probability of a rate cut Sept. 7.

100% probability of a rate cut by year-end.

Changing-Rate-ForecastsThat’s what prices of closely-followed overnight index swaps (OIS) were implying at the close of business on Monday. OIS trade on market expectations for Bank of Canada rate moves.

That amounts to a 180 degree swing in market psychology. Just a few weeks ago traders were pricing in a rate hike by January.

“As we’ve seen, markets can swing and perception can swing quite aggressively, and we could well be back to a fall expectation [of a rate hike] in a month’s time,” said RBC economist Eric Lascelles to the Globe & Mail.

Lascelles counterpart at Scotiabank, Derek Holt, says: “Any talk of the Bank of Canada hiking this year is just foolish in my opinion.”

Peter Gibson, chief portfolio strategist at CIBC World Markets notes: “I think it’s clear that there are a lot of serious problems still in the world and it’s more likely that we’re setting the stage for a sustainably low level of interest rates for a very long time.”

And that is the takeaway here.

Despite the roller coaster of emotions as of late, this about-face in rate assumptions reminds us of the necessity to focus on long-term trends. Long-term, North America’s prognosis still seems compatible with low-growth and low-inflation. That’s an environment where fixed mortgage rates typically underperform.



US-Treasury-yieldsSidebar: U.S. bonds, which often lead Canadian bonds, shocked many and rallied hugely on Monday in a safe-haven play.

Yet, the fact that U.S. Treasuries are one of the “least bad” places to park your money doesn’t completely inspire long-term confidence, given America’s fiscal nightmare.

Global investors with billions in U.S. debt are talking a big game about how they’ll never sell Treasuries, yada yada… The fact is, a lot of them have to say that. Numerous foreign governments and major investors want to diversify their holdings outside of Treasuries and they know they cannot all whack bids (sell) at the same time.

For that reason, we may see strategic piecemeal selling of Treasuries once volatility fades and it’s safe to go back in the water. That could boost U.S yields at some point and when it does, hopefully Canadian bonds get enough bids from investors leaving Treasuries to keep our yields from rising in parallel.

Rob McLister, CMT

  1. It is highly unlikely with the level of huge debt that canadians have the BoC would lower rates. They have already taken on so much debt that Carney and company have been for the past year jaw boning people into getting rid of the debt pile. Keeping rates low or reducing them will cause people to cotinue to needlessly pile on unsustanable debt. Just look at the markets to see what high debt levels get you.

  2. Hi Chris,
    Thanks for the question and kind feedback. The conventional wisdom for most well-qualified borrowers is to go variable. It becomes a whole different risk/reward equation if 5-year fixed rates drop below 3%. A lot can change economy-wise in a year.
    So yes, I (personally) would consider an aggressively-priced 5yr fixed if it fit the bill based on rate, product features and my scenario at the time.

  3. Western countries economies are based on debt. This is how it was designed. Without the debt, most countries were not be able to build the infrastructure and civilization we are used to. Now managing the debt is another issue altogether. Canadian government should aim to learn from the US and do what is important (reducing the debt) and not what is urgent.
    On the personal side, Fixed vs Variable… my comment is, yes be aware of the macro (direction and rate levels) but most important be aware of the micro (your own ability to keep payments and the amount of debt owed).
    Will Canada become like Japan or Switzerland with ‘forever and ever’ low mortgage rates?

  4. Which is better – a 3 year fixed at 3.54% with 3% cash back or a 3 year fixed at 2.58% with no cash back? Am I correct in calculating a rate differential of .96% per yr for 3 years, or 2.88% total, making the cash back option a better deal, particularly if I reinvest the cash back. Am I figuring this right?

  5. Hey Adam,
    Sometimes the cash back can come back to haunt you later in the mortgage term if you need to break early… But the FI i work for is offering a 3yr fixed on mortgages over $400,000 with 3% cash back at a rate of 3.50% if you applied the cash as a lump sum directly back to the mortgage you would have to get a 3yr fixed at 2.37% to be further ahead at the end of 3 years.
    Not something you want to get into unless you are confident that you will be staying in your property for the next 3 years as cash back becomes part of your penalty if you break the term early! If you get stuck… the mortgages are portable and blendable but not things you want to bank on!

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