Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News
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Last Friday the latest Canadian employment report was released by Statistics Canada and it smashed expectations. Not surprisingly, bond yields shot higher on the news and lenders increased their five-year fixed-mortgage rates shortly thereafter.
Let’s start by taking a look at the highlights from the latest employment report that got everyone so excited:
The immediate investor response to this employment report was predictable. Markets are made at the margin and an employment report that comes in ten times higher than the consensus forecast can certainly be expected to push bond yields higher over the short term.
Investors were quick to speculate that a surge in our monthly employment data may be a signal that our labour market is entering a tightening phase. Since there is an 80%+ correlation between rising labour costs and rising inflation, higher interest rates won’t be far behind if this tightening trend comes to fruition. But does this sudden spike in employment signal the onset of higher inflation or is it just a one-off blip?
As I read about the details in the report, I began to suspect the latter. Here are the factors that led me to that conclusion:
Five-year Government of Canada (GoC) bond yields rose nine basis points last week, closing at 1.57% on Friday. Interestingly, yields had been down four basis points by close of business on Thursday but surged fourteen basis points higher after Stats Can released its latest employment data. Lenders scrambled to raise their five-year fixed rates in response, so for the time being, borrowers are going to have to tolerate five-year fixed rates that are now slightly above the lowest in history.
Five-year variable-rate discounts are offered in the prime minus .45% to .50% range (which works out to 2.55% to 2.50% using today’s prime rate). Variable-rate mortgages are marginally more attractive now that the spread between five-year fixed and variable rates has widened somewhat.
The Bottom Line: When a key piece of economic data smashes expectations as our latest employment report did on Friday, investors tend to shoot first and ask questions later. While their initial reaction was to sell off GoC bonds, pushing their yields higher, I’ll be surprised if there is much follow through this week for the reasons listed above. If I’m right, then any uptick in bond yields and, by association, our mortgage rates will be short lived.
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