Bond Yields Are Rising. Are Mounted Mortgage Charges Subsequent?
Some of Canada’s Big 6 banks made headlines last week by cutting mortgage rates. But maybe they have to turn around soon?
Bond yields rose sharply in the US and Canada on Monday, and as CMT readers know, bond yields are typically ahead of fixed mortgage rates.
In Canada, 5-year bond yields closed at 1.069%, a 20-month high. This closing price was above an earlier high water mark and resulted in the 5-year return returning to pre-pandemic levels.
In the US, ten-year bond yields rose to a nearly three-month high after the Federal Reserve indicated it could soon phase out its asset purchase program.
The question that concerns brokers and borrowers alike is: will fixed mortgage rates soon follow these rises?
“If we don’t see yield declines, the chances are that the lowest fixed rates will rise within a week or two. Most of the others would then most likely climb before Thanksgiving, ”Rob McLister, mortgage editor at RATESDOTCA, told CMT. “Normally I would say earlier, but the banks just cut interest rates and are so rich in cash that they might wait a little longer.”
However, McLister points out that some mortgage lenders may start raising rates as early as this week.
“When yields rise, the lowest fixed rates usually jump first,” he told us. “These interest rates are usually more closely linked to securitisations, the costs of which move more directly with the returns.”
While the big banks, which control most of the mortgage financing, are unlikely to immediately reverse their recent rate cuts, McLister says they are currently “sacrificing margin for market share.”
“I doubt they’ll want to do this much longer as the 5-year swap spread is close to an all-time low of 0.44,” he said, noting that 4 and 5 year swaps are a very crude proxy from . are 5 fixed financing costs of major banks. What does that mean? “Fixed price buyers shouldn’t waste time locking in a price,” advised McLister.
Looking ahead, however, some think that short-term rate hikes may prove temporary.
Dave Larock, a mortgage broker at Integrated Mortgage Planners, wrote on his weekly blog that once the Fed goes through its tapering plans, fixed rates are likely to rise, which should also push the Canadian government’s bond yields higher at this point.
“But when that event is over, I still share the view that today’s heightened inflationary pressures will ease and that the Fed and BoC’s GDP growth forecasts will both prove too optimistic if pandemic-induced fiscal stimulus programs cease to be part of their stimulus programs support. “Economies,” wrote Larock.
“If I’m correct, fixed rates should settle in the coming months even if they calm down again.”
Interest rate forecasts
Others, like the British Columbia Real Estate Association (BCREA), expect fixed rates to stay around their levels through the end of the year.
In its latest mortgage rate forecast, BCREA said the average 5-year discount rate will remain at 2.1% in 2010, before rising to 2.15% in the first quarter of 2022 and 2.25% in the second quarter.
“Since the direction of the interest rates is determined” epidemiological rather than macroeconomic factors is difficult to predict with certainty, ”BCREA Chief Economist Brendon Ogmundson wrote as a disclaimer.
“Once again normal macroeconomic drivers take precedence in determining mortgage rates whenever that could be we expect fixed rates to gradually rise again Pre-pandemic levels, while the floating rate of the Bank of. follow Canada’s road map.”
The BCREA also expects average floating mortgage rates to remain at 1.5% through 2022, and now sees the Bank of Canada’s earliest rate hikes not materializing until 2023.
“We assume that the Bank of Canada will proceed with caution especially in light of the fourth wave of COVID-19, ”noted Ogmundson. “The unexpected GDP contraction in the second quarter displaced that Closing the output gap by one to two quarters. Probably that means a new schedule for the Bank of Canada to raise its policies Rate with the earlier increase in mid-2023. “
At least so far, big bank economists continue to expect at least one rate hike of 25 basis points in 2022 (BMO, CIBC and TD) or possibly two (NBC, RBC and Scotiabank).
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