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Bond Record #3

Bond-yields-plummetFive-year bond yields hit another record low for the third straight day.

That’s reason to celebrate if you’re shopping for a fixed mortgage, or at least it should be.

The rates on fixed mortgages, which track bond yields, are due for a monster cut. Just don’t ask when.

To put things in perspective, the difference between today’s posted 5-year rate (5.39%) and the corresponding 5-year yield (1.39%) is a whopping 4.00 percentage points. That represents the widest spread (lender profit margin) in ages.

“The lag (in dropping fixed rates) is really about financial institutions assessing whether the movement is going to be sustained,” TD economist Craig Alexander told the Globe.

“There is a distinct possibility of a decline in five-year mortgage rates, but it is not clear how much of a decline there will be.”

Hopefully it’s better than a “possibility”. Based on a “normal” lender spread of 135 basis points above 5-year yields, ultra-deep-discounted 5-year fixed rates should theoretically be near 2.75% today. But theory means nothing as these are not normal times.

As of this moment, no one expects widely available 2.75% 5-year rates anytime soon. If you can find a 5-year rate in the low 3% range, that is an accomplishment.

Once the banks adjust rates and we know where the market dust settles, we’ll post a full fixed/variable mortgage cost comparison.

Rob McLister, CMT