Bonds plummet to lowest levels in Canadian history = Lower Fixed Interest Rates

US debt default averted, but there will still be growing pains to get accustomed to new spending cuts

Kyle Green – Mortgage Alliance

Canadian Bond Rates

As US Congress announced Tuesday Aug 2nd to increase the debt ceiling to $14.7 trillion, bond yields plummeted to 1.76% for a 5 year bond yield, crashing through the 2% “support” level. Only days later ,for 3 consecutive days records, were set for the lowest 5 year bond yields in history (the lowest reaching a 1.36% close on August 10th). Rates had been over .7% higher only 2 weeks prior to the debt ceiling increase, signalling the largest drop in bond yields since March 2009. There are a number of factors that have an effect bond yields, but the most notable over the past week have been:

• Spending cuts built into US Congress’s debt agreement, which will have a negative effect on US demand for Canadian exports.
• Continually weak data coming out of the US.
• Ongoing worry about the euro debt crisis.

Because of the above, more money has been flowing to Canadian bonds, lowering their yield. To understand why the yield would drop, imagine you are a company looking to raise money for your business. If nobody is waiting around to offer you money, you would raise the amount you are willing to pay to borrow the cash (increasing the yields). However, if people were lining up to lend you money, you would be more inclined to reduce your interest costs and reduce the yield (which is what is happening in Canada right now). So, in a way, bad news around the world is good news to Canadian borrowers.

As of Aug 15th, bond yields at 1.61% would reflect a fixed rate range of 3.01% – 3.21%, so there is definitely downward pressure on rates, which currently sit at 3.69% with most major lenders. I expect that if bond yields remain the same for another 5-10 business days, we will see .1% – .3% decreases across the board for fixed rates.
Lenders will be cautious in volatile markets like this, as they don’t want to plummet rates and have throngs of pre-approvals come in, only to watch bond yields have a significant rebound to cut into the currently healthy spreads. Once one lender does it, we’ll see the rest follow. Unfortunately, they’re all happy with the nice spread they’re making and will keep it that way until the business stops flowing in.

Bond Flow

Final Thoughts: If you are thinking on locking in your mortgage, the next month might be a great time to take advantage of low fixed rates over the short term. Make sure if you have a pre-approval your broker or bank is “rolling it over” so that you have a new rate hold at potentially lower rates in the next few weeks.