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Fear gave way to hope in financial markets this week. That led traders to look past recent European downgrades and push Canada’s 5-year yield to a 6-week high.

The 5-year government bond (which typically leads fixed mortgage rates) ended the week at almost 1.40%, up 13 basis points.

Fixed-Mortgage-Rate-Indicator-5-Year-Yield

(Click to enlarge)

Yields have had every opportunity to make new lows this year. Yet, despite distress in Europe and mixed economic messages domestically, they’ve held strong.

Lenders will watch bonds in earnest next week to see if the trend continues. A meaningful break above 1.50% on the 5-year yield could halt or reverse the rate reductions we’ve seen in the last 10 days.

Looking further out, uncertainty is as great as ever. But that doesn’t stop analysts from crystal balling. Below is a sampling of rate expectations currently making the rounds:

  • TD’s Craig Alexander told CTV: “I don’t see (mortgage) rates coming lower than they are today (without) a banking crisis in Europe…”Interest rates are about as low as they can possibly go at this point.”
  • RBC’s Eric Lascelles agrees, telling CTV News “You’re now getting down to levels that are astonishingly low, at least in the underlying government bond yield—which is really the benchmark that banks are setting their mortgage rates off of. Those rates will struggle to go much lower. There is a negative real return.”
  • Traders are making “massive allocation shifts (out of bonds),” Sheldon Dong (vice president of fixed-income strategy at TD Waterhouse Canada) told the Wall Street Journal. (That’s often bullish for yields, at least in the short term)
  • There’s also growing talk that the great bond bull market is getting long in the tooth. Today’s yields are breathtakingly low because traders have felt like “the world was coming to an end,” investment strategist Harvey Rowen told MarketWatch. “One could argue that U.S. Treasury yields (which are correlated to Canadian yields) probably won’t go much lower, if at all, but they can stay surprisingly low for longer than most people predict, especially while the euro overhang persists.”

Rob McLister, CMT

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