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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