Bond yields have now reached a two year high.
We all know that mortgage rates follow bond yields around like the Papparazi on a Kardashian family vacation. As such we will be seeing mortgage rates creep higher, like the miniskirts on those same vacationing ladies.
The real question, and the one we attempt to answer each time one of these moves occurs, is whether one should lock into a fixed rate mortgage for fear that they will continue to rise.
Bond yields are impacted by many factors, right now in Canada the greatest impact on our Bonds is being felt from south of the border. The United States is trying to understand precisely when the Federal Reserve will begin to curtail its bond purchasing program. As the financial markets double down on their bet that the Federal Reserve will slow down its bond buying, bond yields will continue to increase.
The Federal Reserve released the minutes from their most recent meeting on Wednesday of last week. No real indication was given as to when the bond buying program will begin to be phased out, but most believe that it will begin soon, or perhaps has already begun.
Canada's economy is heavily reliant on the US; this should come as no surprise to anyone. It is also heavily reliant on our housing market. Our nations GDP is almost 20% housing related. This means that anything that impacts the housing market will impact the nation’s economy as a whole very significantly.
With the Canadian economy struggling, and the American economy garnering a lot of attention and drawing investors from around the world with its promise of double-digit gains in real estate once again, and a strong and well performing US dollar, Investors are being drawn to invest more of their wealth south of the Border.
Canada previously benefited by being the better looking, stronger younger brother of the US. But now, just as Edward Snowden has discovered, Big Brother is getting stronger, and everyone is betting on his success. As investors pull money out of Canada for fear the Canadian dollar will weaken further relative to the US dollar, bond yields will increase if for no other reason than to draw investors.
There is still a long way to go in this recovery, but if we look at the past 6 months as an indication of the next 6 months bond yields will continue to move higher and so too will mortgage rates. Although I believe that mortgage rates won’t shoot up past the 4% mark until at least the end of the year we must still be cautious.
As this article from yesterdays Globe and Mail indicates where Bond yields go from here will also be influenced by the profits that the Big Banks in Canada can make on the increased in yields.
With little prospect of the Prime Rate moving anytime soon Canadians should start looking at Variable Rate mortgages as a viable alternative to chasing fixed rates as they head higher. Canada can’t control its Bond yields the way the United States has been controlling theirs, but if they do keep shooting higher, one thing is for certain; our economy will not grow as fast. The slowing economy will leave little reason for the prime rate to be increased and as such variable rate mortgage will stay low.