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
Fixed 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.
Despite 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
European 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.
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.”
If 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
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