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Author: Rob McLister, CMT
If you want to know what’s moving Canadian mortgage rates, watch the American news.
The reason? Canadian bonds are 95% correlated with American bonds
(Treasuries) and bond yields are 97% correlated with 5-year fixed
mortgage rates. (See: Yields and Fixed Mortgage Rates
In other words, Canadian rates are married to U.S. rates. So it’s no
wonder that our mortgage rates are being shifted by things like the U.S.
and fiscal cliff
Below is a list of factors weighing on mortgage rates right now:
Rates are in a tug of war between bullish factors (those lifting
yields) and bearish factors (those depressing yields). Here’s a current
summary of each:
Bullish factors for rates
- Cliff relief: The U.S. dodged a full-scale swan
dive off the “fiscal cliff.” As a result, relieved traders have been
selling “safe” bonds and rotating into riskier assets. There may be more
of that to come, especially if debt ceiling talks progress better than
- Spring Market: Bond and real estate seasonality are sometimes underestimated. As the prime homebuying season approaches, fixed-rate mortgage demand could help support yields.
Bearish factors for rates
- A U.S. Econoflop: Congress’s new tax increases
are growth and job killers. And, the wasted opportunity to cut spending
means future U.S. “austerity” measures could be more severe.
- Debt Ceiling: In a few months, Congress will face its next big decision: raise the debt ceiling
for the 41st time in 30 years, or let the U.S. default. The latter
isn’t likely but the thought of it could perpetuate the safe-haven trade
(i.e. keep people from dumping bonds and driving up yields).
- Euro-risk: Europe’s three years of debt turmoil has
been upstaged, but not eliminated. European central bank liquidity is a
Band-Aid solution and Spain and Greece are in depression.
Wildcards for rates
- Rating agencies: The New Year’s fiscal cliff compromise cut just $12 billion in U.S. spending, while adding $4 trillion
of new debt. Credit rating agencies must be shaking their heads.
Without budgetary tightening by spring, another downgrade is not
unthinkable. Losing another AAA rating would either seriously damage the
Treasury’s “risk free” reputation and spike yields, or compel investors to buy U.S. Treasuries in knee-jerk fashion (like in August 2011).
- U.S. and/or Canadian Outperformance: Most traders expect low rates to stick around. But if employment improves significantly and traders sense that the Fed
is abandoning its commitment to hold down rates, all bets are off. The
historic Treasuries rally will unwind and yields will lift-off.
At the moment, there is maximum uncertainty. While nobody expects major rate increases near-term, a 20-30 basis point
increase would shock no one.
So if you need a mortgage in the next six months, don’t hesitate to lock in at today’s epic low rates.
Rob McLister, CMT