With 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!
(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
Last modified: April 29, 2014
yipee!! looks like I made the right move 2 weeks ago. I had early termination of my 3.69 5year-fixed(just finished my first year), pay the penalty , shifted to variable prime -.85
What kind of penalty did you pay? What is your recalculated breakeven interest rate over the next 5 years? What fixed rate pricing would you receive if you wanted to get back into a 5-yr fixed ?
based on my calculations if prime wont change in next 9 months the saving i will get will cover my penalty(bank gave me 20% discount in my penalty). I guess I would have to stay variable in next 2 years and see from there if i still go back to fix.
Wow gotta love how this changes so much from month to month!!! Love being in variable and looking back at all the predictions that we would already be at 1.5-1.75 BOC rate by now with no stopping it into 2012. Just love it!!!! Feel bad for all you fixed rate people.
The problem with these type of market variations are that they encourage people to load up with debt. I would expect some regulation may be on the way.
The regulation will be in the form of higher short term interest rates.
The banks are waiting to see where this leads. After today’s sell-off (and if you’re awake at this time, the massive sell-off is continuing in Asia where markets just opened) I think we will see a reduction coming in posted rates very shortly. Let’s be real we’re talking about a drop of nearly 60bp over two weeks. I think a reduction should have already happened and the banks are just trying to milk the margins while they can.
From my point of view, the latest news is a mixed bag. On one hand, investors who are heavily exposed to equities lost a lot of money today. Investors who rely on fixed income (bonds, GICs, saving accounts) will now their returns erode even more.
On the other hand, borrowers will continue to enjoy very low interest rates. But as we know rather well, low rates come at a big cost to the overall economy. While housing prices have recently shown at least some minute degree of moderation, there’s no doubt that a prolonged low rate environment will quite possibly exacerbate valuations. And that’s not good for consumers who are already heavily leveraged with their equity or those who are thinking of taking the plunge into home ownership in an already distorted and overvalued housing market.
So you gotta take the good with the bad.
I will say that it’s pure amateur hour what’s happening in Europe. A bunch of incompetent imbeciles are running the show there and most of them are still on their holidays. I hope people don’t expect the Fed step in and soften the blow as there’s nothing in Bernanke’s disposal that can turn things around. The three-month U.S. treasury note actually went into negative territory today. Investors are not only lending the Americans money for free but at a loss! We really have run out of options.
Lior, I really enjoyed your comment. I think it is an almost certainty that the US is into a recession, and 2012 will not be kind to them. Spain and Italy have seen yields sky rocket and are simply too big to bail out. The world is in financial shambles and the worlds central banks I think are out of bullets.
My position is that there will not be a “crash” per se, rather a long slow stagnation in our economy as well.
As for housing markets in Canada, buying is still an option as long as people have a long term focus. I think it is quite possible houses bought today may be worth the same amount in real dollars in the long run.
Chris, you save on one place, but will loose from another :)
A couple of lenders are now offering sub 3% 5 year fixed. With my mortgage coming up for renewal in the next 3 weeks I have to decide between:
~2.1 (P – 0.9)
or
~2.94 CMHC insured or 3.04(5 year fixed)
I am still leanding variable but the 5 year fixed is looking tempting.
What would you do?
Hi Jeff,
Thanks for the question. Unfortunately we can’t advise on term selection in these forums. A recommendation would depend on other information that is not stated in your question.
The best bet is to contact a mortgage planner. He/she can quickly do a proper and comprehensive analysis based on your unique circumstances.
Cheers,
Rob