Taper Talk Tapered

FedThe U.S. Fed surprised the markets yesterday by leaving its $85-billion-per-month stimulus program intact.

Most analysts expected a reduction (“tapering”) in the Fed’s bond buying, due to hints from the Fed itself. But the U.S. economy is still not self-supporting. Its recovery is ironically being slowed by the Fed’s own jawboning—which has driven up long-term rates and created economic drag.

All of this “taper talk” matters to Canadian mortgage shoppers because of the intimate link between the U.S. and Canadian economies. Canadian bond yields, which lead fixed mortgage rates, dove on yesterday’s announcement. As of this writing, the benchmark 5-year government bond is down to 2.01%, 15 basis points off yesterday’s high.

If yields break today’s 1.99% low there could be improvement in deep-discounted fixed rates. The number to watch on the upside is 2.17%. Above, that, expect higher long-term fixed rates—other things being equal.

Variable rates, which largely hinge on the Bank of Canada’s overnight rate, are going nowhere fast.

  • Typical discounted 5-year fixed rate:  3.49% +/-
  • Typical discounted variable rate:  Prime – 0.45% (2.55%) +/-

Rob McLister, CMT

  1. The Fed knows exactly what it’s doing. The problem, they are acutely aware, is that all sectors are hooked on the lowest rates associated with their quantitative easing.
    Any mention of tapering that Q4 and the markets hiccup. They’ve tried before and failed. Q4 is a drug the economy cannot live without. We’re no different – our low interest rates have stimulated a housing market that jitters when there’s indication of a rate hike (through bond yields or mortgage rates).

  2. The only “jittering” in the RE market has been steadily upwards, thanks very much.
    Always on the verge of a “crash” though; right?

  3. The Fed and Obama have been bragging that things are getting better and employment is up but this proves that the Fed Lies…the US economy is not doing so well. If they eased QE the market would have tanked. It’s a bad sign, the Fed is very worried about the economy.
    But don’t worry Canada is doing great, no issues here, Real Estate is still a great investment, I’m sure it will keep going up at this same pace…no crash here…2.69% mortgage’s are coming back…you can still buy a freehold townhouse in Mississauga for just under $500,000…what a deal!…inflation is under 1%, if you don’t include shelter, utilities, food, insurance, taxes…I’m currently arranging a mortgage for an investor buying a detached in Mississauga…he’s so happy to be putting $150,000 downpayment and having to subsidize by only $800 a month…What a deal.

  4. The Fed knows what it’s doing. If stock markets rejoice because of all of the stimulus, that is secondary to the desired goal. The real game that is being played is active currency devaluation behind the curtains. When it is all played on a relative scale, it doesn’t actually matter how much of it you provide nominally.

  5. If the cost of living is too high for you, move to a place where the cost of living is less. Or make more money. Don’t blame others for your circumstances. Take personal initiative and make them better.

  6. 5 year government bond is down to 1.88% as I type.
    IYO how much lower must it go before big 6 banks drop their “special rates”?
    Thanks.

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