A Thursday Thumping: Fixed mortgage rates follow bond yields most of the time. Yet, despite stocks surging since March on recovery hopes, bonds have been arguably more realistic (less optimistic). Well, today stocks converged meaningfully with bonds…finally. The talking heads on TV say the Fed’s outlook and accelerating COVID cases scared the market and we’ve gone as high as we can go without more hope for a vaccine. The S&P 500 dove almost 6% as a result. Oil sank 9%. Meanwhile, Canadian 5-year yields are now once again just 10 itty bitty basis points away from their all-time lows. If we crack those lows, fixed rates will dip again, especially thanks to this next point.
Credit Spreads Have Largely Recuperated: The spike in the chart below shows how panicked investors got over Canada’s Big 6 Banks in March. It also shows how unpanicked they are now, despite banks announcing record loan loss provisions. This is glad tidings for mortgage shoppers. When this spreads drops, it typically coincides with wider profit margins for mortgage lenders. Wider margins mean banks can discount more—if they want to. Shrinking credit spreads and falling bond yields are usually a recipe for lower fixed mortgage rates. Last week, we saw 1.99% for the first time on bank-offered high-ratio5-year fixed rates. Given current margins, it’s possible we’ll see 1.99% on uninsured 5-year rates too. And with 4 out of 5 mortgages being conventional, 5-year 1.99% uninsured rates could really get borrowers’ juices flowing.
Deferral Anxiety: With CMHC warning of a “deferral cliff” in the fall, it begs the question, how steep is the cliff? One in six mortgages are deferred and Bank of Canada staff say, “The effectiveness of the deferrals in limiting the rise in [mortgage defaults] depends crucially on the speed of the recovery in the labour market.” That could put us in a sticky spot come October, when the unemployment rate could be 68% (four percentage points) higher than it was in February, according to the latest Bloomberg economist survey. Some analysts suggest as many as 1 in 10 deferrers could default if the government doesn’t head this off at the pass. After all the money Ottawa has spent to avoid economic oblivion, we simply don’t see it letting expired deferrals take down the market. CMHC is preparing for this looming issue as we speak. Here’s to hoping employment roars back so we don’t rely so heavily on what they come up with.