RBC: Rate Rush to Boost Yields

mortgage-interest-rate-forecastHere’s something the debt-wary Feds don’t want to hear:

“There are reasons to expect huge volumes of mortgage applications this year, which will contribute to a very weak four- and five-year sector of the curve.”

— RBC fixed income strategist Ian Pollick (Source: Bloomberg)

Pollick speculates that 5-year yields could pop 20 basis points higher “during March and April.”

That’s not what mortgage shoppers like to hear either.

At the moment, there are multiple bullish forces pushing yields up, including:

Spring Mortgage Demand

spring-market-for-mortgagesFixed mortgage rates are based, in large part, on bond yields.

Canadian bond yields are, to some degree, influenced by mortgage volumes.

As spring homebuying fever livens up, demand for mortgage funds often forces yields higher.

Bloomberg notes that, “Banks use 5-year interest-rate swap contracts to offset loans they make to homeowners. This year, demand for fixed-rate mortgages means banks will seek to ‘pay fixed-rate’ in five-year swaps.

That’s a technical way of saying that mortgage funding and hedging activity could lead to “higher bond yields,” says Bloomberg.


The aforementioned mortgage demand, along with other economic factors, creates a historical seasonality to bond yields. The chart below illustrates that well.


(Click to enlarge)

This graph depicts the median relative percentage change in yields, by month, over the last 31 years. (Data Source: Bank of Canada)*

As is evident from the chart, there is a clear tendency for yields to ascend in March and April.

That doesn’t mean the same will happen this time around, but it is certainly true historically speaking.

Economic Performance

GDPDespite ho-hum growth numbers on our side of the border, the U.S. economy is starting to chug a little faster. No one knows if this recovery has legs, but there’s definitely reason for optimism. The bond market is starting to cautiously reflect that.

The Quest for Yield

bull-marketEuropean risk (at least perceived risk) is moderating after the reasonably successful Greek debt swap.

That’s motivating traders to sell “low-risk” government bonds and buy higher-returning assets, like stocks. This, in turn is proving bearish for bond prices and bullish for yields.

Technical Factors

As mentioned February 21, there has been a breakout in yields.

From a technical standpoint, some analysts argue that government bonds have been way overbought.

Now, many traders are looking to pare back on bond exposure after months of sideways movement. If this bond selling continues its momentum, it too will be bullish for yields. (Here’s a related story on the potential Treasury bond bubble…)


(Click to enlarge)


We’d remind folks that bond yields are a fickle animal. They can reverse course ever so hastily. (Remember fears of a double-dip recession just six months ago?)

To balance growing optimism, the Fed cautioned today that “unemployment…remains elevated.”

It added, “…Strains in global financial markets…continue to pose significant downside risks to the economic outlook.”

All things considered, however, there appears to be a better than even probability that rates could be higher in the next one or two months—barring any crisis.

As such, those scoping out a pre-approval or fixed mortgage might be well-advised to get their rates held soon. Five-year rates of 2.99% to 3.49% can be held for up to 90 and 180 days respectively, depending on where you live.

With analysts calling for rate hikes for over two years, there’s a risk of sounding Chicken Little-ish here (“Rates are rising! Rates are rising!”). But caution never hurts, especially when multiple factors collide to heighten rate risk.

Sidebar:  Former Bank of Canada economist, David Madani, told the Toronto Star: “I think we’ll see more of this (aggressive mortgage rate discounting) in the near future.”

2.99-MortgageIf yields continue inching higher, however, there’s every possibility that rate sales will be pulled. That includes BMO’s 2.99% special, as well as dozens of more preferable mortgage rate promotions.

Incidentally, while BMO’s rate sale is meant to run until March 28, 2012, it clearly reads “Offers may be changed, withdrawn or extended at any time without notice.” Based on a rough approximation of BMO’s base funding costs, its revenue margin has been getting uncomfortably tighter by the day.

*  This chart illustrates percentage change, not percentage point change (e.g., an increase from 1.00% to 1.10% is considered a 10% increase in yield, on a relative basis).

Rob McLister, CMT

  1. Does anyone else find it odd that Scotiabank lowered its five year posted rate to 4.99% but no other bank followed?

  2. Rob Excellent job of keeping everyone informed of changing trends in the market.
    In the rush to grab the lowest rate in this environment,many consumers are being led into a decision that will have a serious impact on them in the future when interest rates do rise.It was only 5 years ago that best discounted rates were between 5-6% and that could be the case in 5 years time again.
    This is the time for the mortgage brokerage industry to shine and show the consumer we look after their best interest,not the lenders.
    This is the time for us to show the consumer that there is more to a mortgage than rate.
    This is the time for us to show our clients we are here for more than an commission on placing their mortgage.
    A solid mortgage strategy that emphasizes long term security,creation of equity and a partnership with our clients in helping them achieve long term financial goals.The Inflation Hedge Strategy accomplishes all of that.
    The 2.99% offer will be long forgotten in 5 years time.

  3. With the 5 year Yileds moving up so much 1.67 Today) makes you wonder how long before the mortgage rates go up. I would assume average lender loses between 30-60 Cents on a 5 Year mortgage these days! just not enough money for them!

  4. It looks like the current 2.99% BMO party and the products competing with it could be over before the party invitations got in the mail.
    Five year GCAN Bonds are at 1.62 this morning. Get the rates locked in.

  5. You mentioned in your article that there are 2.99% rates held for 120 – 180 days. Which lenders are these? The longest rate hold I have on a 5 year 2.98% is 90 days. This information will be very useful for dealing with my client renewals that are coming up outside of the 90 day window. Thanks!

  6. Hi Tracy,
    It read: “Five-year rates of 2.99% to 3.49% can be held for up to 90 and 180 days respectively, depending on where you live.”
    The “90” day hold was respective of the 2.99% rate.

  7. You fail to consider the negative feedback loop that will unfold as consumers taking on less debt means lower GDP, resulting in less revenue for business who will scale back by cutting jobs. The economy is in checkmate App.

  8. Debt-service improved mainly due to higher incomes. How can that be negative?
    Lose the doom and gloom “schtick” already.

  9. Only you would believe a CBC headline. The debt service ratio did not improve because of higher incomes, rather it was the credit market debt to net worth ratio that improved only because credit contracted.
    “Household credit market debt increased in the fourth quarter despite a slower rate of borrowing in consumer credit and mortgages. This led to an increase in the ratio of credit market debt to net worth to 25.3% from 25.2% in the third quarter. The debt service ratio was unchanged in the fourth quarter. The ratio of credit market debt to personal disposable income declined to 150.6% in the fourth quarter from 151.9% in the third quarter as personal disposable income increased at a faster rate than credit market debt.”
    Catch the spin? Credit market debt contracted making disposal income ‘appear’ to rise. Get your facts straight App.

  10. …”personal disposable income increased at a faster rate than credit market debt.”
    What part don’t you get?

  11. $55,000 credit / $35,000 disposal income 157%. Credit market contracts now it’s $50,000/$35,000 142%. Only the ratio changed, not incomes, hence, income increased at a “faster rate.”

  12. Just wondering if anyone thinks the 5yr rate might go lower or now is the time to lock in if you have one of the rate holds

  13. The overall market for real estate and mortgages looks good to me.
    Is that on topic?
    I recall Governor Carney intimating that he has many tools in his arsenal.
    Higher 5-year rates will push folks back to variable.
    It’s a great market.

  14. I wouldn’t get greedy. Bond yields have blasted off like a rocket. How much lower do you want than 2.99%??

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