Rates Slip Further

Source: Giphy

Canadian interest rates are still sliding.

On Monday, Canada’s 5-year bond yield—which drives fixed mortgage rates—closed in the 1.50% range, something it hasn’t done since November 2017.

Dozens of lenders have trimmed fixed rates in recent days as yields keep tumbling. And big banks are not excepted.

With skidding home sales, weakening property values and mortgage growth near multi-decade lows, the Big 6 are more aggressive than we’ve seen them in months.

Indeed, the majors seem worried. We hear through the grapevine that at least one big bank is over 15% behind plan on its mortgage business this year (that’s a lot).

Rates Du Jour

The best big bank rates on 5-year fixed terms now average about 3.44%, with some of our readers reporting offers as low as 3.34%.

The real story is with terms less than five years. For the first time in several months, the big boys are competing hard on 3- and 4-year fixed rates. Some 3-year bank rates are effectively as low as 2.99% through brokers. Banks are pushing these terms, in part, due to funding cost advantages and to there being less competition for 3- and 4-year money.

Deviating From the U.S.

Most of the time Canada follows U.S. rates. “Traditionally, Canadian 5-year yields will import about two-thirds of any movement in U.S. 5-year yields,” according to the Bank of Canada. “This can affect Canadian mortgage rates even with an unchanged stance of Canadian monetary policy,” Governor Stephen Poloz said.

But so far this year, Canadian yields are beating U.S. rates in the race lower. We’re the yellow line on this chart below, which shows the relative strength of U.S. and Canadian 5-year yields.

U.S. vs. Canadian 5-year Bond Yields YTD (Source: MarketWatch)

Our 5-year yield is now an additional 10 bps below the U.S. 5-year, compared to where it began the year. And it’s no mystery why. Despite glowing jobs numbers, Canada’s economic output has lagged the U.S. (bigtime), for six quarters in a row. Worse yet, record-high debt loads relative to income, risk “amplifying” the coming slowdown—as the Bank of Canada reminded everyone last week.

Still Looking for a Bottom

Back in November, Governor Poloz suggested: “the long-term downward trend in bond yields is over.” But the market doesn’t seem to think so, not with today’s 5-year bond rates above 2-year rates.

The Bank of Canada may claim that rates “will need to rise to a neutral stance to achieve our inflation target,” but don’t focus on what it says, watch what the market does.

The BoC is notoriously bad at the prediction game. “It is typically 1.6 percentage points off the mark with its first GDP forecast for any given year,” writes Barrie Mckenna. (Major economists forecasting one year out are off by 0.8 percentage points, he adds). “The central bank downgrades its forecasts roughly two-thirds of the time.”

So if you’re going to put your faith in any macro forecast, put it in the market’s.

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