Wednesday’s Historic Events Nudge Rates Higher

The Mortgage Report: Jan. 6, 2021

  • U.S. 5-year yields leaped to a 7-week high on Wednesday as Democrats took control of all three houses of government, thanks to their historic win in Georgia.
  • Canada’s 5-year yield rose in sympathy by a less notable 2 bps, but economists nonetheless expect more of an incline in rates this year. The reason: Democrats are expected to break open the government’s purse strings with $2,000 stimulus cheques, infrastructure spending and an array of other giveaways.
  • It’ll be paid for, in part, with gobs of debt. That scares the bejesus out of bond traders (when traders sell bonds, rates go up). There’s no panic by any means, but there’s also less reason to buy U.S. government bonds than there was last week. And Canadian 5-year rates have over a 90% correlation with 5-year U.S. rates.
  • Canada’s 5-year/5-year forward rate rose to its highest level since March on Wednesday: 1.21%. That’s where the market expects 5-year yields to be at this time in 2026 — i.e., 79 bps higher than today (and 14 bps below the 10-year average). If that were to theoretically happen, your run-of-the-mill uninsured 5-year fixed rate would land somewhere around 2.50% — far from a catastrophic rise.
  • Of course, inflation could exceed or underwhelm expectations by then and push rates significantly higher or lower. It’s best not to guess how things will shake out, especially if you’re a borrower with a tight budget. You may want to focus instead on managing rate risk with a fair penalty fixed rate, and take Wednesday for what it was, a clue that low rates may last “less long” after 2021.

BoC Chatter

  • There’s more and more speculation about a “micro-cut” by the Bank of Canada—i.e., a 10-15 bps reduction in the overnight rate. Not coincidentally, two-year yields, which follow BoC policy expectations, hit an all-time low on Wednesday. And the OIS market is pricing in almost a 10-bps BoC cut by year-end, albeit that’s been the case for weeks.
  • If we can make it through this early-2021 lockdown without too much more economic destruction, optimism may return and take a rate cut off the table. That remains to be seen.
  • In the meantime, none of this chatter is ample justification to go variable on your mortgage. There’s just not enough upfront savings relative to a fixed, and relative to the rate risk ahead in 2022 or 2023. While rate hikes are nearly the last thing on the BoC’s mind today, recessions do end, and rates do revert to their mean.

Case of the Disappearing Credit Score

  • This woman’s credit score disappeared, reports CTV News. It went from 670 in May to non-existent in October when she tried to get a mortgage. That seems a bit odd but, “While there is no such thing as a [credit] score of zero…consumers may not be aware [that] after a period of no credit activity, their credit files may become ‘unscoreable,” Equifax told CTV.

Mortgage Bytes

  • HSBC, which officially has the lowest mortgage rate in Canadian history, is reportedly so swamped it’s taking 3-5 business days (according to HSBC staff we spoke with) to get back to people who apply online. If you want to reach a human faster—without walking into a branch—the best bet is to phone right when the call centre opens at 9 a.m. ET, we’re told.
  • Act now and get a 20-year mortgage at 0%…if you move to Denmark.
  • TD cut some posted fixed rates this week:
    • 6-month: 3.09% to 3.04%
    • 1yr: 3.14% to 2.79% 
    • 2yr: 3.19% to 2.94%

The main reason this matters (since few people pay posted rates) is that it jacks up IRD penalties considerably for TD customers breaking their mortgage one to two years before maturity.

Quotable

  • “The spectacle of a mortgage and housing agency overtly hostile to home ownership has been all the more bizarre because it is at odds with public opinion and with the expressed objectives of the Government of Canada [namely the First-Time Home Buyer Incentive],” says OREA’s Tim Hudak about CMHC (via The Star).



6 Comments

  • Appraiser says:

    I have a silly theory regarding Mr. Evan Siddall.

    Here goes. The reason he’s still at the helm at CMHC, is that he is otherwise unemployable.

  • Abccookies says:

    gold/silver, uranium inflation hedges (commodities) btc if you must no bonds they aren’t safe any more.
    Look at how much money is being printed…get ready to lock in low rates as well. 50% of Canadian bonds will be in the hands of the BoC by 2022. Banana republic along with the USA but Canada sold all its gold.
    Yield curve control and defaults are going to be conflicting forces. My bet is that BoC can keep rates at 0 or negative but at some point lenders have to raise rates anyways and don’t say there isn’t any inflation.
    The CPI doesn’t measure inflation, go look up “inflation substations” And “hedonic adjustments”.
    Or
    Economy picks up with the vaccine money velocity picks ups we overshoot inflation and rates go up.
    We are F’ed the monetary system is cooked. Too much debt that can’t be paid back…when they created Bretton woods they know at some point this would happen…
    Tesla worth almost a trillion? Larger than all the major auto makers combined? They didn’t even provide 1% of the worlds cars last year but is worth more than them all?
    Yes, Yes you can spot Bubbles…we are in the biggest one yet.

  • Lallous says:

    @TheSpy In the meantime, none of this chatter is ample justification to go variable on your mortgage. There’s just not enough upfront savings relative to a fixed, and relative to the rate risk ahead in 2022 or 2023.

    I have been quoted 1,70 % variable 5 years (prime-0,75) or 1,89 % fixed for a refinance in QC ? No other rates since I am stuck with the same lender for another 5 years (bona fide clause and chose fixed rates in 2019 and I regret the 2 today :()

    Should I choose variable or fixed for a 600K$ non insured mortgage ? If the spread was more than 20 bps, I would jump on variable but so far I am hesitant.

    Any thoughts ?

    • The Spy says:

      Hi Lallous, You’re not alone. A lot of people who think they’ll never refinance get a low-frills mortgage with restrictions and end up refinancing. They save 5-10 basis points on the front end but pay more on the back end.

      Fixed vs. variable is a personal decision based on factors like this –> https://www.ratespy.com/fixed-or-variable-rate-the-decision-checklist-02223752

      I will say that the 5yr fixed you mentioned is 20 bps above the leading advertised rate. The variable is 36 bps above the leading advertised rate. Not great but not surprising, given the lender has you by the you-know-what.

      It may not work but I’d tell your lender you found much lower rates elsewhere and ask them to improve their offer to retain you as a loyal client when the mortgage matures.

      If they refuse, ask if they can offer you a shorter term, like a 3-year fixed, at a better rate.

      Good luck!

  • Rhet Oracle says:

    Appraiser

    You may be onto something. Puking 20 points of market share isn’t what I’d term “a resume stuffer.”

    Maybe he could be Mark Carney’s gopher though? “Hey Siddall, go fetch me a double double and some Timbits, boy!”

  • Refi Guy says:

    That is no theory, he announced internally in late September that he had applied for a position with another organization and was not the successful candidate.

    Government has bigger concerns rather than finding a person to replace the head of CMHC.

    Most big organizations can run a year or two without a quality leader (though some might say that has been the case for the past 5 years at CMHC) though in a while, without a permanent Head the organization will start to suffer.

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