The entire mortgage market was waiting, and now, after 10 months, it finally happened. Canada’s 5-year bond yield (which influences fixed mortgage rates) broke through major resistance, resistance that goes all the way back to April of last year.
It’s a signal that better economic times lie ahead. A sign that inflation should no longer be just an afterthought. A sign that the lowest fixed rates in Canadian history are in danger of vanishing.
Bond yields are climbing because traders see the economy in a much better place in 2022, and because North American governments have deteriorating balance sheets and need to flood the market with their debt.
Those who brush aside the inflationary aspect of that last point should note that after the next round of U.S. stimulus, 40% of all dollars in circulation will have been printed in just the last 12 months. Money supply still matters.
An epic surge in fixed rates may not be in the cards, however. At least not according to analysts like John Stoltzfus, Chief Investment Strategist at Oppenheimer Asset Management. In a report released Wednesday, he wrote, “We expect that a process of reflation—rather than untoward levels of inflation—will see interest rates rise modestly…We also point out that…markets, as discount mechanisms pricing the future, can indeed get ahead of themselves.”
No doubt, a lot can go wrong with the inflationary / higher rate thesis in the coming quarters. For all anyone knows, the Bank of Canada could embark on yield-curve control and cap 5-year rates for months on end. Or perhaps a third virus wave will leave far deeper economic scars.
Either way, for now the risk of near-term fixed-rate hikes is legit. And that’s without even considering the potential for surging refinance volumes in the next 30-60 days as people rush to lock in.
In 2018, many paid over 3.50% for their mortgage, two points higher than they can get today.
A mini-refi boom would spike mortgage demand further, which in turn would boost demand for hedging through interest rate swaps, which (without getting too much in the weeds here) would further push up mortgage funding costs.
Given how integral oil is to Canada’s economy, it’s easy to understand why crude prices influence mortgage rates. That’s why a Bank of America report today caught our eye. It said, and I summarize: “While electric vehicles are unlikely to impact oil demand materially near term, they should trigger a global oil demand peak by around 2030.”
Other things equal and over time, that would be somewhat disinflationary and somewhat bearish for interest rates. “Over the next three years,” however, “we see a window of strong oil demand with consumption rising at the fastest pace since the 70s,” the bank said.
That’s all the more fuel for rising rates since higher oil prices often coincide with higher inflation.
How do you use this information to pick a mortgage? You probably can’t, at least not with reliability and precision. It’s simply the type of thing that adds one more (tiny) reason to go fixed for your next term and perhaps variable thereafter, particularly if long-term fixed rates shoot 100-125+ basis points above variable rates.
This & That
At 91%, Canada’s sales-to-new-listings ratio is almost unfathomable. Parabolic prices will coax homeowners to list their properties, particularly when lockdowns are in the rearview mirror. The question is, how high will prices run before that happens? Prepare for a whirlwind spring market.
CMHC has re-confirmed that “the new First-Time Home Buyer Incentive expansion should be available to apply to in the spring.”
“Given such low interest rates, some [HELOC] borrowers are relying on home equity appreciation to more than cover the interest cost of [their] additional debt. That may be fine over the short-term, but is a poor long-term plan.”—Rona Birenbaum, CFP (via the Globe & Mail)
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