Yields Crash, Lower Fixed Mortgage Rates Coming

The 5-year bond yield has nose-dived 16 bps today, crashing through “support” at 2.00%. It’s the biggest plunge in yields since March 2009.

As of this writing, the 5yr GoC sits at 1.87%—seemingly en route to its 28-month low of 1.835%.


Yields are hurtling lower in response to a slew of negatives including:

  • “Austerity measures” (spending cuts) built into Congress’s debt agreement. Those will drag on Canada’s economy.
  • Weaker economic data out of the U.S. (like yesterday’s brutal ISM number)
  • Ongoing angst about the euro-debt dilemma.

On a positive note, global investors are now finding Canadian treasuries far more appetizing—due in part to Canada’s AAA debt rating, budgetary prudence, and stable currency. That has sparked a money rotation into Canada, adding to today’s bond buying. (When investors bid up Canadian government bonds, our yields drop.)

With the American debt Band-Aid in place and yields crashing, lenders should now be ready to drop posted fixed mortgage rates (barring unforeseen events).

Today we’ve already seen:

  • A major bank lower discounted fixed broker rates by 10 bps to 3.69%
  • A few non-bank lenders cut 5-year fixed rates by 10 bps
  • Brokers offering 3.39% on no-frills mortgages.

Variable-rate mortgagors should also benefit from all of this (mortgage-wise, if not economically). That’s because a BoC rate hike appears to be off the table in 2011…if you believe what Overnight Index Swaps (OIS) and BAX futures are implying. If true, prime rate will stay put for at least the short-to-medium term.

Definition: OIS [Overnight index swaps] and BAX [bankers’ acceptance] futures are derivatives that move up and down based largely on expectations of BoC rate policy.)

Rob McLister, CMT

  1. Go variable and post payments based on a 5-year fixed rate.
    The major factor yesterday was the debt crisis in Europe, which is now poised to spread to Spain and particularly worrying, Italy. The markets were down big time yesterday as investors piled money into government bonds (including U.S. treasuries, which were re-affirmed with a triple-A rating yesterday but with a negative outlook). There’s a lot of concern out there so I think the yield on Canadian bonds, in light of what’s happening with the U.S. and contagion in Europe, would reach all time lows. Good news for borrowers, bad news for savers or those who rely on fixed income assets.
    Canadian bond yields aren’t the only ones on a path to reaching record lows. U.S. treasuries, U.K. gilts, the Yen, the Swiss Franc, etc. etc. Even gold at nearly 1,700 who would have thought?

  2. And yet, the banks didn’t pass on the savings with any posted rate cuts. I guess the savings for home buyers or mortgage renewers will only come from good negotiating.

  3. > Go variable and post payments based on a 5-year fixed rate.
    Good to hear someone else advocating this. I just signed the paperwork on this very strategy. There are few reasonable scenarios I could come up with where I didn’t end up ahead over the term of my mortgage.

  4. Hi Dan,
    Discretionary rates are improving at some of the banks but nothing yet on posted rates. That said, unless yields unexpectedly soar like they did at the end of June, posted rates should come down a bit.
    The spread between 5yr posted rates and 5yr yields is 352 bps. A spread that wide doesn’t usually last long. The 10yr average is 283.

  5. You must see oil go down a buck a barrel on any given day and expect a same-day gas station price reduction on your drive home from the office?
    It was only a few days ago that rates were 30bps higher. Lets give it a week or two and see if this new rate direction sticks.

  6. Hi Mark,
    For sure. There are a lot of short bond traders getting squeezed out there.
    For what it’s worth, overnight index swaps (a multi-billion dollar derivatives market that tracks BoC rate expectations) are pricing in an 8% chance of a hike Sept 7.
    OIS traders are not fully pricing in a rate move until late 2012. That’s how bad traders (the guys with big bucks on the line) think things have become.
    Mind you, market expectations are highly volatile so take this with a grain of sodium chloride.

  7. when oil goes up, the pump price sure goes up quickly.
    Shell rack price in edmonton has dropped over 3cents a litre in the last week, yet prices at the pumps went up 10 cents a litre 3 days ago.

  8. Scratch that, 5-yr yields went all the way to 1.72% … unbelievable. A 40 basis point drop in just one week! 55 bps in two weeks.
    That’s the lowest since March 2009.

  9. Just to button this up, the yields bottomed out at 7:30 AM today (Friday) at a yield of 1.645% before finally starting to bounce. This was within 14 basis points of the all-time low from Jan/09.

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