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The Economics of Mortgage Rates


This has to be on one of the most confusing times in Canadian mortgages for a long time. We have inflation numbers come out at 0.7% when they were expected to be 0.9% and yet bond markets are on the rise causing mortgage rates to climb with them… this is not the way macroeconomics was supposed to work.
 
So what made this get so out of control – largely an announcement by the U.S. Federal Reserve that later this year it would begin cutting back its massive $85 billion per month program to purchase U.S. treasuries and mortgage-backed securities.
 
The BIG STORY in all this is the US 10 Year Treasury Yield above 2.6%….the US Treasury 10 year yield of 2.63% is up a staggering 102 bps (1.02%) from its 1.61% May low. Ben Bernanke (US Reserve Chairman) cites even after this material rise in yields, the gap between the S&P equity yield and the US 10 Year is still more than TWICE the average of 1.9% since the year 2000 implying there is still room for yields to rise considerably. This means that there may be broader based concerns for Canada government bonds as well - thus fixed mortgage rates.
 
I would be surprised if we saw the Bank of Canada or the US Federal Reserve move their overnight rates, but as per my chart below… this is about as good as it gets for variable rates for over 75 years. The broader based market implications are that for the near term expect lots of upward pressure on fixed rates, but inflation will not put the prime lending rate up anytime soon.

---Calum Ross, Toronto Mortgage Broker