When Spain’s 100 billion euro bailout was finalized and the euro zone’s leaders wrapped up the latest European summit shortly thereafter, both Italian and Spanish bond yields dropped precipitously. The ensuing press conferences successfully triggered the market’s Pavlovian response to buy while the flash bulbs were going off, but the knee-jerk rally didn’t last long.
Crisis-hardened investors have learned to hold their enthusiasm until they see what’s behind the curtain. Once they started to focus on the details, discrepancies between the post-meeting sound bites and what was actually agreed upon started to emerge.
Here is what I learned over the last week about those devilish details.
For a crisis, the euro zone’s financial meltdown has been surprisingly predictable. If past is prologue, we have now entered the next build-up stage where Spanish and Italian bond yields will bounce upwards until the sound of trumpets announces the next round of emergency measures . Then comes the next knee-jerk rally that fades faster than a sugar high, and around and around we go. Wash, rinse, repeat until either the markets refuse to buy Spanish and Italian debt or the euro-zone countries agree to cede their fiscal sovereignty and to accept pan-European oversight of their budgets. For now the slow-motion train wreck continues.
Five-year Government of Canada (GoC) bond yields were down 3 basis points for the week, closing at 1.18% on Friday. Market five-year fixed-rate mortgages are still priced in the 3.09% range but at those levels lenders are enjoying higher-than-normal spreads. As such, borrowers who shop around can do better, particularly high-ratio borrowers who can find fully-featured five-year fixed-rate mortgages at less than 3%.
Variable-rate mortgages are offered at only small discounts off prime (prime minus .20%, or 2.8%) and I think that leaves them too close to fixed rates to justify their inherent risk.
The bottom line: The euro-zone crisis remains the dominant force that is governing market sentiment and ongoing fears of a euro-zone collapse should continue to drive demand for the relative safety of our GoC bonds. If that trend holds, our bond yields and, by association, our mortgage rates, will remain at ultra-low levels until the euro zone looks a lot different from today.
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