5-year Yield Dives Past All-time Closing Low

Rate-dropCanada’s 5-year government yield (which guides fixed mortgage rates) has tumbled a remarkable 27 basis points. That’s the most since the September 15, 2008 Lehman Brother’s bankruptcy.

Canada bonds (whose prices move inversely to yields) are gaining on a flight to quality and a feared North American economic downturn.

Even U.S. Treasuries are being panic-bought, the very securities that were downgraded by S&P.

If yields were to stay at these levels (that’s far from guaranteed), widely available 5-year fixed mortgage rates could drop to below 3% for the first time in history.

So far, the major banks have delayed cutting posted 5-year fixed rates since the 5-year yield was at 2.18%—a whopping 65 basis points higher than today. In normal markets, a 20+ basis point move is generally enough to move posted rates.

Rob McLister, CMT

  1. CanEquity was advertising “lower than 3.02%” for a 5 year fixed. They were at 3.11% last week. This is certainly the lowest 5 year rate I’ve ever seen (or heard of). I’m assuming there’s a lot of conditions on this though.

  2. If they published “less than 3.02%” for a 5-year fixed, it’s done to circumvent an agreement they have with a certain lender. I saw a couple of other brokerages using the same tactic.

  3. I think that today was an over-reaction and we will see yields increase once the dust settles this week. The reason I believe this would happen is because with stock prices plummeting, this week is a good opportunity to buy stocks (albeit cautiously) and the markets will slowly rebound. While I don’t think we will gain back what we lost over the past week, at least not in the near term, investors will actively look for bargains and there will be an out-flow from sovereign bonds.
    I’m more concerned about what’s happening in Europe than the U.S. being downgraded by S&P. The way European officials are kicking the can down the road is an epic failure of monetary policy and eventually this would cause a myriad of problems.

  4. Hi Lior, Many thanks for the post. It’s so tough to say how the euro-saga will play out. That aside, you may well be right about yields posting a big reversal once most of the fear is flushed from the market. It’s certainly a timely topic and we’ll cover it more tonight.

  5. If Canequity is quoting the lender I think they are then they should be cut off immediately. It would be a clear violation of that lender’s “no advertising” rule in my mind and totally unfair to other brokers who have to play by the rules.

  6. I’m worried that banks will not pass on any of the lower bond yield costs, just like happened in early 2009. When yields were at all-time lows then, mortgage rates were even higher than they are now … banks blamed the “uncertainty” … I hope they’re not pulling the same stunt again.

  7. Hi Dan,
    Back in those liquidity crunch days of early 2009 there were fat risk spreads built into mortgage rates. Spreads are nowhere near as drastic today.
    I think now we simply have banks milking interest margins for every last drop of profit they can.
    Fortunately, today’s market is too competitive for that to last. Again, barring a drastic spike in yields, bank-advertised fixed rates are due for a cut this week.

  8. Bond yields just dropped huge again this afternoon, currently at an all-time low of 1.45. The early morning gains are gone. This is starting to get ridiculous, the major banks need to drop their rates to stay competitive. A 30 bps drop isn’t going to be good enough, more like 50 to 60.

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