For the 2nd time in 50 years the “Yield Curve” has inverted – meaning that long term rates are now lower than short term rates. This can signal a recession is on the way.
This Means …
- Alberta will look better comparatively to Canada’s hot housing markets which should finally cool down.
- Canada’s Prime rate increases look to be on hold until Spring. This makes the variable rates now look MUCH Better. There were 3 rate increases expected and these may not materialize – making the VARIABLE rate look better.
- Broker lender’s have VARIABLE rates that range between .1% and .65% BETTER than the banks do. If you are looking at variable rates we should look further into this in more detail.
DATA BELOW …
- More on the predictions on rate increases
- WTF is an inverted Yield Curve – lifted from “the Hustle”
Predictions on Prime
Three interest rate hikes in 2019 — that’s what economists have been predicting for months, as part of the Bank of Canada’s ongoing strategy to keep the country’s inflation levels in check. But, according to one economist, that plan may have changed.
The BoC held the overnight rate at 1.75 percent yesterday, and released a statement a senior economist at TD, believes hints that the next hike may not come until next spring.
“We no longer expect the Bank of Canada to hike its policy interest rate in January,” he writes, in a recent note examining the BoC’s decision. “Spring 2019 now appears to be the more likely timing.”
Meanwhile the Canadian rates and macro strategist at BMO, puts the odds of a rate hike in January at 50 percent.
“While the Bank reiterated its desire to get policy rates to neutral, the path to neutral is clearly more uncertain than just a couple of months ago,” he writes, in his most recent note. “Looking ahead to January, the BoC will likely need to be convinced to hike (rather than not).”
A VIDEO ON WHY VARIABLE RATE MAY BE THE WAY TO GO FOR YOUR PLANS
- This video is from my colleague Dustin Woodhouse and he perfectly presents the story on the variable. He also ONLY works in the BC Lower Mainland; if you live there HE should be doing your mortgage, if you don’t WE should be.
2. WTF is an ‘inverted yield curve,’ and what does it mean for the economy?
For the first time since 2007, the 2- to 5-year US Treasury yield curve has inverted. Historically, this has served as a somewhat reliable indicator of economic downturn, which means people are freaking out, which means…
OK, hold up: What exactly is a yield curve, and why is it inverting?
‘Lend long and prosper’ (so say the banks)
In short, a yield curve is a way to gauge the difference between interest rates and the return investors will get from buying shorter- or longer-term debt. Most of the time, banks demand higher interest for longer periods of time (cuz who knows when they’re gonna see that money again?!).
A yield curve goes flat when the premium for longer-term bonds drops to zero. If the spread turns negative (meaning shorter-term yields are higher than longer maturity debt), the curve is inverted…
Which is what is happening now
So what caused this? It’s hard to say — but we prefer this explanation: Since December 2015, the Fed has implemented a series of 6 interest rate hikes and simultaneously cut its balance sheet by $50B a month.
According to Forbes, the Fed has played a major part in suppressing long-term interest rates while raising short-term interest rates.
Yield curve + inversion = economic downturn (sometimes)
The data don’t lie. A yield curve inversion preceded both the first tech bubble and the 2008 market crash.
Though, this theory has had some notable “false positives” in its lifetime — so it’s not exactly a foolproof fortune teller.
Heck, IBM found the size of high heels tends to spike during hard times. As of now, the experts who believe the sky to be falling remain in the minority.
There is lots to digest in the data above. Please feel free to contact me to discuss in more detail.
Mark Herman, 403-681-4376
Top Calgary Alberta Mortgage Broker
We are getting many calls on this so here is how it works for MOST of the banks.
The Bank of Canada (BofC) reduced their Prime rate by 1/4 % or .25% last week to 0.75% from 1% where it has been for about 3 years.
The banks took a while to decide ifthey were going to lower their rates as well. 3 times before the banks have either not passed on the entire rate reduction to customers or not moved at all and kep the savings to themselves.
Now that most banks have lowered their rate by .15% this is how payments are impacted:
a. If they have an Adjustable Rate Mortgage – ARM mortgage – then the rate will be the new rate starting on the “effective date.”
b. The payment after the next payment will change to reflect this new rate. (So if you pay monthly on the 1st, the Feb 1st payment will be your current payment, but the March 1st Payment will be the new payment, If you pay weekly every Friday, this Friday will be the same payment but the next Friday will be the new payment)
c. Because the rate has gone down, your payment will decrease.
d. Because the interest rate has gone down, the next payment that is still at your existing payment amount will apply a little more to your principal.
e. Customer will receive a letter with their new payment amounts in the snail-mail.
Hope that clears things up a bit.
Call if you have questions.
Mark Herman, Top Calgary Alberta Mortgage Broker.
We all know interest rates are going to go up. Even after reading this the big hit we all know is coming is that variable rate mortgage payments go up right away. The rest mentioned below may come later.
Jason Heath Mar 31, 2012 – 7:00 AM ET | Last Updated: Mar 30, 2012 9:09 AM ET
For three years, the word on the street has been that interest rates have nowhere to go but up. But few Canadian commentators – other than David Rosenberg – got the call on rates right. Although the prime rate has risen since dropping to an all-time low of 2.25% in April 2009, the increase to the current 3% rate that has remained stable since September 2010 has been modest to say the least. Long-term rates, like fixed mortgage rates, have gone up and come back down during that time, such that one can currently lock in fixed rates under 3%.
York University’s Moshe Milevsky did a study in 2001, which he revised in 2007, and determined that borrowers are better off going with a variable rate mortgage instead of a fixed rate mortgage approximately 9 times out of 10. That said, we have to be close to if not already in that 10% sweet spot where fixed beats variable.
Despite the opportunity to lock in low rates today, it could actually be beneficial for the average Canadian for rates to rise. Conditions need to warrant rate increases and the Bank of Canada (which directly governs the prime rate) and the bond market (which indirectly governs fixed mortgage rates) won’t raise rates until the time is right. How soon that time comes depends partially on domestic influences, but also on our neighbours to the south and the current eurozone debt debacle.
Greece is a perfect example of why rates should rise. Greek participation in the European Union gave them access to cheap credit and helped facilitate some of the excess spending that has them where they are today. Despite bond markets demanding higher interest rates on Greek and some other European government bonds, market intervention by the EU has helped keep rates artificially low.
The U.S. Federal Reserve has been doing the same thing, buying up U.S. government treasury bills to keep U.S. rates artificially low as well.
It’s hard to justify how artificially low interest rates for an extended period are good for anything other than delaying the inevitable for some market participants.
Higher rates would have a negative impact on those of us with outstanding debt, as higher interest charges would follow. But Canadian debt levels have moved ever higher in recent years, likely a response to the low rates that have been in place in part to stimulate spending. Higher mortgage rates could protect us from ourselves by making higher debt levels more punitive and less tempting.
Furthermore, fixed income investors could benefit. The emphasis on “could” is key. Rising rates typically hurt those holding bonds because today’s bonds are that much more appealing than yesterday’s as rates go up. How much the hurt hurts is a matter of fact. But those renewing GICs or sitting on cash these days are desperately awaiting higher interest rates to help their savings grow. So higher rates could at least lead to higher returns for fixed income investors in some cases.
Higher rates could benefit stock investors. Once again, the emphasis on “could” is key. Higher rates usually mean the economy is improving and inflation is rising. This could be a good sign that corporate profits and corresponding stock prices are moving higher. That said, one has to wonder if low bond and GIC interest rates and cheap credit have pushed more money into the stock market than should otherwise be there. Rising rates could bring income investors back to the more traditional income investments like bonds and GICs from the blue chip stocks they’ve potentially flocked to in order to obtain yield.
Despite the purported uncertainty above on stocks and bonds, higher rates should at least contribute somewhat to restoring equilibrium to credit, debt and equity markets. Something seems wrong with near zero or negative real interest rates. That is, something seems wrong with a GIC investor earning 2%, paying 1% of that away in tax and 2% inflation resulting in an effective return of -1%. On that basis, something seems right about higher interest rates, whether we like it or not. What happens to mortgage debt, stocks and bonds remains to be seen.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto.
This is an article that was sent to me. It is totally technical and I love it. This is the real reason behind what are the lowest rates we have ever seen.
It also explains why the days of Prime -.95% are GONE for what looks like a long time.
In between the lines is says rates are going to go up quickly as soon as there is a sniff of recovery.
In the last few days, RBC and Scotiabank have eliminated their advertised variable-rate discounts.
They’re now promoting variable mortgages at prime + 0.10%, twenty basis points more than their previous “special offers.”
Prime + 0.10% (i.e., 3.10%) is an interesting number. A few months ago consumers thought that fat variable-rate discounts were here to stay. Variables above prime will now come as a shock to some people.
The banks are well aware of that. They know that pricing above prime impacts consumer psychology.
They could have priced at prime. Spreads are not that horrendous. But pricing above prime makes more of an impact. It makes higher-profit fixed rates more appealing and it mentally prepares consumers for potentially higher VRM premiums down the road.
That said, banks are not just arbitrarily sticking it to borrowers. Far and away, the main reason variable rates are worsening is that banks’ costs are rising.
At the moment, there are multiple factors at play:
• Higher risk premiums are compressing margins.
O We have Europe to thank for the that.
O The TED spread, a measure of interbank credit risk, just made a new 2½ year high. As volatility increases, banks have to factor that into their funding models.
O Another reflection of risk is the most recent floating rate Canada Mortgage Bond (which some lenders use to fund variable-rate mortgages). It was issued at a 15 basis point premium over the prior issue in August.
• Margin balancing is an underlying bank motive.
O Banks have publicly stated their desire to even out margins between profitable fixed rates and low-margin variables, and they’re slowly doing just that.
O Back in September, RBC Bank exec David McKay put it this way: “…Given the dislocation between fixed and variable, the very, very thin margins (of variables), we felt we needed to move prices up in our variable rate book.”
• New regulations (e.g., IFRS) have boosted the amount of capital required for mortgage lending.
O That has lowered the return on capital for mortgages, and thus influenced rates higher.
• Status Quo for prime rate doesn’t help margins.
O Lenders partly rely on deposits (that money rotting in your chequing and savings accounts) to fund VRMs.
O Demand deposit rates rise slower than prime rate. So, when prime goes up, some lenders get wider margins temporarily.
O When expectations changed three months ago to suggest that prime rate will fall or stay flat (instead of rise like expected), it was bad news for some deposit-taking lenders. That’s because they now have no spread improvement to look forward to in the near-to-medium term.
O MBABC President Geoff Parkin says that until recently, “lenders have been prepared to accept low (VRM) profit margins with the knowledge that, as the prime rate inevitably rises, so too will their profit on variable mortgages.” As it turns out, the inevitable is taking longer than the market expected.
Hi All – many people ask how we know that rates are going to change ahead of time. Below is a sample of the data that we read on a daily basis. If you were motivated enough to read things like this every day – or figure them out for yourself – then you would know too. Or, just let a mortgage broker do it.
Bond yields today are roughly where they were a week ago but there has been plenty of volatility over the intervening period.
Last week yields were pushed higher by in-line or better than expected economic data in Canada (Manufacturing Sales Growth, Trade Balance) and the US (Retail Sales Growth, Initial and Continuing Jobless Claims, Trade Balance), together with a sense of optimism that the European debt crisis will be resolved and/or that concerted steps there would be taken to protect the banking system.
Generally speaking, “good” economic news tends to push bond yields higher as market participants are less interested in the safety bonds provide.
Notwithstanding last week’s developments, yields have come back down today as worse than expected economic data in the US and a clarification from Germany that a once-and-for-all solution to Europe’s debt crisis will not be forthcoming and that markets should expect such crisis to extend into next year.
In all, these developments present the global economy in better shape than what we thought at the start of the week, and the rise in rates reflects that change.
This last blip in the stock market has taken the wind out of the world’s recovery sails. It now looks like rates are going to stay the same or go DOWN!?! for the 12 months or so.
The USA has said for the 1st time ever that they are not going to change their rates until 2013. They have never given a date in the past and this IS a big deal. It means that Canadian rates are going to have to track closely to the USA rates or our dollar will skyrocket and quickly slow our growth and path to recovery.
That would mean that while fixed rates have NEVER been better in 111-years, variable rates are also super attractive because Prime (P) will now stay close to 3% (where it is today) and the rate of P-8% = 2.2% for a mortgage is CRAZY low now that we know it is going to stay around there for 2 more years!
Call to discuss if you have any questions on this. 403-681-4376: Mark
A 180 Degree Change in Rate Views
- 46% probability of a rate cut Sept. 7.
- 100% probability of a rate cut by year-end.
That amounts to a 180 degree swing in market psychology. Just a few weeks ago traders were pricing in a rate hike by January.
“As we’ve seen, markets can swing and perception can swing quite aggressively, and we could well be back to a fall expectation [of a rate hike] in a month’s time,” said RBC economist Eric Lascelles to the Globe & Mail.
Lascelles counterpart at Scotiabank, Derek Holt, says: “Any talk of the Bank of Canada hiking this year is just foolish in my opinion.”
Peter Gibson, chief portfolio strategist at CIBC World Markets notes: “I think it’s clear that there are a lot of serious problems still in the world and it’s more likely that we’re setting the stage for a sustainably low level of interest rates for a very long time.”
And that is the takeaway here.
Despite the roller coaster of emotions as of late, this about-face in rate assumptions reminds us of the necessity to focus on long-term trends. Long-term, North America’s prognosis still seems compatible with low-growth and low-inflation. That’s an environment where fixed mortgage rates typically underperform.
This is good news for people in variable rates AND fixed rates.
It all means that mortgage rates are going to stay low for longer than expected. Prime will stay lower longer partly because the US has for the 1st time said that they will leave the very low rates until 2013 to give the market something solid to work from.
That will also cause the fixed rates to stay lower, longer.
Good news all around.
By Ka Yan Ng
TORONTO (Reuters) – A dovish U.S. Federal Reserve will likely force the Bank of Canada to keep its interest rates lower for longer, but market bets on a Canadian rate cut by year-end are unlikely to pay off.
Analysts said a rate cut would send all the wrong signals for an economy that is growing, albeit slowly, and could hurt the central bank’s credibility.
“In the current situation, a rate cut by the Bank of Canada would mean that you have a second recession in Canada,” said , Charles St-Arnaud, Canadian economist and currency strategist at Nomura Securities International in New York.
“And that’s not something that we see happening.”
Expectations for Canadian interest rates have swung wildly in recent weeks. As recently as July 19 traders priced in higher expectations of a rate increase this year, following unexpectedly hawkish language from the Bank of Canada.
A July 20 survey of primary dealers showed most saw a rate hike in September or October.
But tightening expectations fell sharply as the U.S. debt ceiling debate and the downgrading of the U.S. credit rating by Standard & Poor’s fueled fears of a recession there, triggering some of the worst stock market selloffs since the collapse of Lehman Brothers in 2008.
Canadian overnight index swaps, which trade based on expectations for the Bank of Canada’s key policy rate, and short-dated government debt began to show expectations of a rate cut rather than an increase.
The Canadian dollar also fell more than a nickel against the greenback as the outlook for monetary policy moved from tightening to easing.
Rate cut expectations were reinforced by the U.S. Federal Reserve’s unprecedented announcement on Tuesday that it would likely keep rates near zero for another two years.
Analysts said the Bank of Canada is likely to keep interest rates lower for longer than previously expected because of the Fed move. One issue is that widening the rate differential between the two countries could cause an unwelcome appreciation in the Canadian dollar.
But they caution that swap markets, which are pricing in a quarter-point rate cut before year end, have it wrong.
Analysts said a cut is not needed because the Canadian economy, though highly dependent on the big U.S. market, is still growing. The central bank’s key policy rate, currently at 1.0 percent, is also seen as still being very accommodative. The rate was cut to a record low of 0.25 percent after the financial crisis.
HOUSING, RISK TO CONFIDENCE FACTORS
Those emergency rates provided conditions for the domestic housing market to surge to bubble-like proportions in some parts of the country, and allowed Canadians to take on massive personal debt loads.
Analysts said a rate cut could reignite these two segments of the economy, risks that have already been flagged by the central bank.
“The bank is going to need a lot more evidence that the downside risks are going to stick with us before they totally rewrite their script from the last statement and move toward outright easing,” said Derek Holt, an economist at Scotia Capital, noting that dovish language would inevitably have to accompany a decrease in the central bank’s key rate.
“That would be a blow to business and consumer confidence in the country as opposed to the more supportive role, which would be essentially to just stay off on the sidelines and not do anything on rates for a long time yet.”
Holt is already the most bearish among Canada’s 12 primary dealers — institutions that deal directly with the central bank as it carries out monetary policy — and is comfortable with his call that the next rate hike will be in the second quarter next year.
If anything, it could be later, “if the Fed is true to its word in terms of maintaining stimulative policy all of next year and into 2013,” he said.
Analysts said the risk of a rate cut is now more likely than an increase, given Canada’s trading ties to the United States and the risk that a recession there would also pull Canada’s economy lower.
“It is probably appropriate to price in some risk of the next move by the BoC being more a cut than a hike, just at this stage,” said Michael Gregory, senior economist at BMO Capital Markets.
“But I think that fades within six months and you start to believe that is going to skew to the next risk being a hike rather than a cut.”
It’s that time again. When Mark Carney and his cohorts ascend Mount Olympus once more for the latest round of talks to decide the immediate future for Canadian mortgage holders.
The prevailing feeling however is that little will result from this month’s scheming and plotting. Another meeting will pass with rates unchanged and the variable rate mortgage holders can rest easily until July 19th signals the next round of talks. While some speculators – who haven’t been paying enough attention to our blog – earlier in the year cited this meeting as the one to kick off a series of interest rate rises, it now appears those speculators were somewhat premature in their estimations. Recent developments have meant it is now highly unlikely we will see a rate increase tomorrow, Tuesday, May 31, 2011.
Economic growth for the first quarter in the US, Canada’s primary trading partner, came in at a highly disappointing 1.8% with consumer spending slowing. And while Canada’s strong dollar has seen investment increase and manufacturing experience a long overdue rebound, these are still highly uncertain times for the Canadian economy. As expressed by Governor Mark Carney earlier this month, fears persist that rising commodity prices, combined with an inflated currency could impede Canada’s ability to increase demand in the US. The commodity boom is no longer serving Canada in the way it had previously during China’s rapid expansion. These concerns combined with the ever worsening European debt crisis and the impending impact of fiscal austerity in the US driven by irrational desires to cut the budget mean a rate hike tomorrow is highly unlikely.
While we feel that interest rate rises are coming before the end of the year we still feel the variable rate offers the greatest value for money. However we always advise our clients that if they feel ill-suited to the uncertainty of a variable rate, they should opt for a fixed. And the good news is that being adverse to risk has rarely been so well rewarded, with fixed rates plummeting in recent weeks. Fixed rates, as we predicted they would, have fallen repeatedly and there has never been a better time to opt for fixed. If you have any questions about anything you’ve read here or would like to hear how the impending rise in prime may affect you, please feel free to contact us at403-681-4376 for sound, unbiased mortgage advice.
Low interest rates seen sticking around- great news for the variable rate people. Remember with a broker lender you lock-in at the best broker rate for the day when you lock in. With the banks you lock in at Posted (or Posed-1% if they pretend that they love you – and they actually love your money, not you.)
That means that for today the broker rate is 3.99% for a 5 year. Posted is 5.66%. If “the bank loves you” you get 5.66-1% = 4.66% BUT you should have had 3.99% at a broker bank.
So would you love your bank back when that happens?
Tuesday’s Globe and Mail
Interest rates have recently being going somewhere unexpected: down.
At their trough last week, the yields on 10-year U.S. Treasuries, the benchmark North American rate, touched 3.11 per cent, the lowest level in six months and more than half a percentage point below their February peak.
Yields on 10-year Government of Canada bonds have fallen, too, and are now virtually identical to their U.S. counterparts.
The sliding rates have surprised many market watchers. With the United States government bumping up against its debt ceiling, inflation ticking upward, and a growing debt crisis in Europe, most expected interest rates to be increasing.
While predicting the future for rates is notoriously difficult, some observers believe that the current low-rate environment may continue for a while. If so, it will mean pain for savers, but good news for borrowers.
A drop in interest rates is equivalent to a sale on the price of money, and corporations are already rushing to take advantage of the easy lending conditions, even if they’re in no immediate need of funds. A case in point is Google Inc., which has $37-billion (U.S.) in cash and marketable securities on its balance sheet, but raised $3-billion from a bond issue last week anyway. Mortgage rates have fallen, too – good news for homeowners looking to refinance.
But lower rates have not turned out so well for some of the market’s savviest players, including Bill Gross, the founder of Pimco, the world’s biggest bond fund. Earlier this year, he sold his U.S. Treasuries, because he thought interest rates were poised to rocket higher, which would drive down prices of bonds.
It’s difficult to fault his logic: only a few months ago, the case for higher interest rates seemed so compelling.
Governments around the world are carrying bloated deficits and massive borrowing needs. In the United States, politicians have yet to agree on any clear path to deficit reduction, despite more than $1-trillion in annual red ink. Meanwhile, oil has been trading consistently around the $100-a-barrel level, thereby lifting inflation, another bond-market negative.
And the U.S. Federal Reserve is no longer putting its thumb on the scale. In less than six weeks, it is going to end its program of quantitative easing, under which it is buying $600-billion in Treasuries to goose the economy. Many bond-market followers believe the Fed’s massive buying binge has been propping up Treasury prices and keeping yields artificially low.
So what has been pushing rates lower in recent months?
A weaker-than-expected recovery is the major culprit. “The global economy, and the U.S. economy in particular, is not on quite as solid a recovery track as people were imagining in the very optimistic days of six months or so ago,” observes Peter Buchanan, senior economist at CIBC World Markets.
A slew of recent statistics underlines that weakness, ranging from the poor state of U.S. home sales to the slowing pace of U.S. manufacturing growth. Meanwhile, the Japanese economy, the world’s third-largest, is shrinking and creating a further drag on global commerce, although few foresee a double-dip recession.
“We’re looking ahead toward a bit of a cooling in economic growth,” said Paul Dales, senior U.S. economist at Capital Economics, who foresees output in the U.S. rising about 2 per cent this year.
That level of growth won’t be “anything to celebrate but it’s nothing like the recession we saw previously,” he said.
Another factor driving rates lower has been the early May rout in commodities, which dampened some of the worry on the inflation front. In addition, the recent sluggish performance of the stock market suggests that investors are getting nervous and growing more willing to buy super-safe government bonds.
Mr. Dales believes the current trends have room to run, and that rates will surprise to the downside.
He predicts U.S. 10-year Treasury yields could slip to 2.5 per cent in the low-growth, less inflation-spooked environment he foresees ahead.
If growth continues to be slow, lower rates might be staying around for a while.
Mr. Buchanan says the most likely scenario, given the poorer economic outlook, is for the Fed to hold off on raising rates until 2013. He believes the yield on Treasuries will rise gradually, instead of falling further, getting back to 3.4 per cent by the end of this year and to 4 per cent by the end of 2012. http://www.theglobeandmail.com/report-on-business/economy/interest-rates/low-interest-rates-seen-sticking-around/article2032075/