Be careful of looking the gift horse in the mouth.
Last week saw multiple broker-channel lenders get more competitive on pricing. That pushed fixed rates down to fresh record lows, inspiring some brokers to advertise 5-year rates at 2.94-2.99% or less.
Much of that discounting was thanks to lower bond yields (which generally lead fixed rates). You can see the recent downtrend in yields in the chart below.
In all of the emotion of plunging rates, however, it’s easy to forget that they can reverse higher just as fast as they drop.
On Friday, the 5-year government yield popped 12 basis points—the biggest one-day increase in almost a year. When that sort of thing happens near lows, after a long downtrend and a period of sideways trading, it often marks a noteworthy change in market sentiment.
As bond traders suddenly reverse their positions, it can halt the drop in yields (and fixed mortgage rates) for a few weeks, and sometimes much longer.
For that reason, those waiting for lower rates before applying for a mortgage may be taking a bit more risk than normal. It’s kind of like passing a gas station on empty to save a few more cents a litre. You may find another station, but if you’re wrong, it won’t be much fun pushing.
If yields bounce much higher (e.g., into the 1.40-1.50% range), deep-discount lenders will waste no time taking rates back up a few notches.
So if you need a 5-year fixed rate, it’s as good a time as any to take the “gift” lenders are giving. This is certainly not to say that rates won’t go lower. (Global and domestic risks could keep yields depressed for a while.) But don’t be afraid that applying now will make you miss the boat on a better deal. When it comes to rates, it’s almost impossible to pick the bottom.
Rob McLister, CMT
Last modified: April 28, 2014
Anyone know why 10 year rates haven’t dropped as much as five year rates?
They’ve been pretty low for a while now… there’s not really much room for the 10-year to drop. Even the current 1%(ish) spread between the 5 and 10 year is smaller than it’s been in the past…
There isn’t as much competition with 10-yr rates, so lenders aren’t motivated to lower them as much.
good analogy with the gas station but the trouble is all the gas prices are generally the same down to the tenth of a cent, much like mortgages..what happened to competition in gas and mortgages?
Gas prices differ by more than a few tenths. Check this:
http://www.torontogasprices.com/
Yes the 10 yr mortgage rates are historically low, but the spread between the 5 & 10 yr bond yield is only about 0.4%:
http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/
The 10 yr mortgage rate in Canada is too high. We could be in for a Japan-like decade of stagnation with VERY low interest rates. That 1%(ish) spread is a heafty price to pay for ‘insurance’.
If the Bank of Canada is truly concerned about our debt obligations and our ‘risky’ variable rate mortgages, why don’t they drive down the long-term rates even further and entice people to lock in?
American’s can get a 15 yr for 3.09%:
http://online.wsj.com/article/BT-CO-20120801-709233.html
And why don’t banks really compete for 10yr customers?
Rates always spike when people least expect it. Anyone who tries to time the market is just taking stabs in the dark. If you’re looking for a 5 year fixed, lock in now under 3%. There is no telling how long these rates will last despite the gloom we read about daily.
Good call here Rob.