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Epic Landslide in Yields

falling-bond-yieldsWith investors scrambling into safe assets, the 5-year government yield dove another 17 basis points today before rebounding slightly.

Capital markets folks are telling us the banks are waiting for the market to “stabilize” before lowering posted fixed mortgage rates.

Yet, with the 5-year yield down a stunning 55 basis points in two weeks, some feel banks are simply dragging their feet to pocket fat spreads.

In the last four days, the 5-year yield has collapsed 43 basis points (the most since the height of the credit crisis in October 2008).

Non-bank lenders have already started cutting fixed rates (which are priced off the bond market). Full-featured 5-year mortgages are now down to 3.49% or less.

In terms of variable rates, the financial market is now pricing in (predicting) the rough equivalent of just one 25 bps BoC rate hike in the next 12 months!

OIS-Overnight-Rate-Forecast

(Click to enlarge)

This chart shows the total implied rate hikes through August 2012, based on overnight index swap (OIS) prices. The market is currently expecting just 23 bps of tightening over the next year.

(Note: The OIS indicator is highly volatile and error-prone, but typically it’s as good or slightly better than most economist forecasts.)

At the moment, our rate simulations indicate the table is set for variable rates to outperform long-term fixed rates. The exception would be if the overnight rate—the basis for prime rate—unexpectedly jumped 200+ basis points in roughly the next 24 months. That’s always possible, but seemingly not probable given the array of economic risks bearing down on us.


Rob McLister, CMT