It was another tough week for the markets as investors continued to downgrade their expectations for the global economic recovery. One of the few bright spots, for borrowers at least, was the continued drop in Government of Canada five-year bond yields and acknowledgement from the Bank of Canada (BoC) that its overnight rate will probably be on hold for longer than previously expected.
The BoC released its biennial Financial Systems Review and on Wednesday, Chairman Mark Carney offered accompanying commentary to the standing Senate committee on banking, trade and commerce in Ottawa. Mr. Carney suggested that second- quarter growth “could be in the 1% range”, which is way off our first- quarter growth rate of 3.9% and lower than the Bank’s previous forecast of 2%. While he was more optimistic about our prospects in the second half of this year, Mr. Carney cited a litany of concerns surrounding the global recovery: sovereign-default risks, trade imbalances, and in the world’s advanced economies in particular, bloated debt levels, the continued weakness of most real-estate markets, and rising structural unemployment. Domestically, he again highlighted the risk of a low-interest-rate-fuelled credit bubble.
Mr. Carney’s view is that this current risk is best controlled through increased regulation, not through tighter monetary policy, i.e. higher rates, at a time when the broader Canadian economy still needs the stimulus. He and Mr. Flaherty, our federal Finance Minister who has made changes to the Canada Mortgage and Housing Corporation’s lending regulations for three straight years, have been thrusting and parrying over whose tools are best suited to ward off a credit bubble for some time now. It’s been interesting to watch this nuanced game of Pass the Political Hot Potato unfold.
A final point to underline from the Financial Systems Review report. While Canada’s direct exposure to sovereign default in Greece and Europe’s other peripheral economies is quite limited, the interconnectedness of today’s global economy means that sovereign default also presents indirect systemic risk. The report highlights this risk, cautioning Canadians that everyone’s interest rates may rise if other countries start defaulting. So in case there was any doubt, we really do have something riding on what happens in Europe.
Five-year Government of Canada bond yields continued their downward march this past week, finishing 13 basis points lower at 2.03%. We could see another round of five-year fixed-rate mortgage discounting over the next few days, although lenders may hold off a little longer to make up for the spring market’s annual profit margin squeeze. If you’re closing a mortgage transaction in the next couple of weeks, you should be getting a lower rate than the one shown on your commitment, so be sure to ask your mortgage advisor about your lender’s rate drop policy.
Variable-rate mortgage borrowers can take some comfort from the BoC’s latest report and the growing consensus that rates will be on hold until 2012. Analysts are also coming around to the view that when short-term rates eventually rise, it may not be with the speed or to the magnitude that they had previously predicted (sovereign default risk notwithstanding).
The bottom line: It continues to look like low-interest rates will be a ray of sunshine on an otherwise cloudy economic day. To maximize their potential benefit, use today’s interest savings to chip away at some extra principal. Your future self (and Mr. Carney) will thank you.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog (integratedmortgageplanners.com/blog). Email Dave
June 27, 2011Mortgage |