Yields Break Out

Some of the most competitive lenders in the market are boosting fixed rates by 10+ basis points, effective tomorrow.

It comes on the heels of today’s upside breakout in bond yields.


The 5-year government yield (which leads fixed rates) sprang up to 1.51% today. That’s a 3½ month high.

If the yield holds above 1.50%, five-year mortgages around 3% could be a bygone, at least for the foreseeable future.

Yields are rallying in response to:

  • The Greek bailout deal
  • Net-positive economic data
  • Increased risk appetite (i.e., traders are selling “safe” bonds and buying other assets), and
  • Technical selling (We’re coming off an epic bond bull market. Some traders are selling bonds and locking in profits [bond prices and yields move inversely]).

Of course, these catalysts are of secondary concern to mortgage shoppers. What’s driving their psychology now is the fear they’ll miss the boat on record low 5-year rates. For 2½ years, we’ve heard that rates are “destined” to rise, and like the infamous housing correction, someday it will happen.

With that concern in the back of people’s minds, we may see a spike in mortgage application volumes in the near term, especially if the Big 6 raise posted rates again.

Of course, future rates are never pre-determined, and they often surprise us. It’s obvious that North America is not out of danger economically. Disappointing econ data or another international crisis could always force yields, and mortgage rates, to fresh new lows.

As always, however, term selection is a calculated gamble and the odds (in our view) have never been more in homeowners’ favour. Someone choosing between a 5-year fixed and a variable is now facing a 35 basis point rate spread between those two. That’s peanuts, and one of the lowest fixed-variable spreads ever!

In other words, today’s borrowers have an extraordinary opportunity to acquire a cheap 5-year “insurance policy” against higher future rates.

Prime rate hikes are expected to start in late 2013, so say the “experts.” Clearly, we all know what economic forecasts are worth (not a lot), but betting against them now—by taking a variable or short-term rate—has perhaps never been so chancy.

As a side note: It’s important to remember that fixed rate increases generally precede overnight rate (and prime rate) increases. Therefore, you can’t rely on the first Bank of Canada rate hike to time when fixed rates will start climbing. (Rate timing is perilous to begin with. Don’t try it at home…)

Rob McLister, CMT

  1. US economy is far from getting better …
    EU economy is far from getting better …
    Canada’s household debt level is at all times high …
    People’s incomes aren’t getting higher …
    People’s expenses are getting higher …
    Where in that picture increasing rates make any sense ?

  2. John, one possibility is that lenders could raise rates independent of Bank of Canada policy if they deem it necessary based on cost of funds, aversion to perceived risk, or even based on opportunity cost if they’re presented with more profitable opportunities to deploy capital. While you’re right that there may not be amtolimit urgent political will to limit liquidity, lenders don’t answer to voters and will ultimately decide based on profitability.

  3. The definition of ignorance: People who stubbornly refuse to allow for the possibility that rates might rise sooner than expected.

  4. The US is a concern and will be for some time but when you read facts about the Euro countries…whoah! Italy has to refinance an average of more than $5 billion in debt per week throughout 2012. If that’s correct, watchout! Yields will continue to get hit hard and spiral up and down!

  5. Home owner and landlord in Winnipeg is wondering If you were able to get the BofM 5yr at 2.99 rate held for 90 days now would be a good time to take advantage of it even with its limitations I have a couple of mortgages that I want to keep the properties long term

  6. The Big Banks will definately raise mortgage rates to increase their profits, using the increase in bond yields as their reasoning and justification. Just like they did when bond yields rose by 17bps a couple of weeks ago…the Big Banks used that reasoning for an increase in mortgage rates…yet they upped their mortgage rates by 40bps not 17bps!

  7. If you can live with BMO’s restrictions then maybe. Or you can pay .2% more for some freedom. Too bad you didn’t shop around. You could have found other options at the same rate with fewer handcuffs.

  8. and so will the C.U.’s and every other F.I. up their mortgage rates except the C.U.’s, who many finance their mortgages straight from their balance sheets likely won’t be increasing interest bearing account or G.I.C. rates.
    What will the C.U.’s reasoning be?

  9. From a technical analysis look at the chart, I would argue that the rate of decline has ceased, but the market has found a new trading range between 1.25 and 1.75. Given that the banks are still enjoying a very high spread on their cost of funds vs actual rate offering, even at the high end of the range.

  10. Currently 1.5 years into my 2.65% variable mortgage and I am starting to get a little worried about what might happen to the rate after watching the cbc this morning. Is it worth the penalty to go and sign a fixed mortgage or play out the interest game?

  11. Prime – .35% is not a good variable rate. If you would find it hard to manage your payments at 4.65% then I would lock in now.

  12. Same reasoning like the banks – greed. They all in the business to make as much money as possible. And if they could sell their mortgages with 1500 bps spread they definitely would.

  13. F.I.’s like all businesses are in business to increase owner value. That’s a Capitalist society and unless you work for free, collect welfare/handouts, or live in a communist society your whole life, you yourself participate and share the exact same ideals.

Your email address will not be published. Required fields are marked *