Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News
Editor's Note: Dave's Monday Morning Interest Rate Update appears
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ahead of the pack.
When the U.S.
Federal Reserve met last week, it offered no hint that it would begin
tapering its quantitative easing (QE) programs any time soon.
That
is good news for Canadians who are in the market for a fixed-rate
mortgage because the Fed’s QE programs are artificially suppressing U.S.
bond yields, which have had about a 90% correlation with their
equivalent Government of Canada (GoC) bond yields over the past five
years. The ultra-low fixed-rate party in both countries is expected to
continue for at least as long as the U.S. Fed keeps buying up a
staggering $85 billion in U.S. government debt each month.
Meanwhile,
Canadian variable-rate mortgage borrowers will also be happy if the Fed
takes longer than previously expected to taper its QE programs because
U.S. and Canadian monetary policies are just as tightly linked as our
government bond yields have been.
The Fed will not raise its
short-term policy rate, which currently sits at 0%, until it completely
unwinds its QE programs. This makes it highly unlikely that the Bank of
Canada (BoC) will raise its overnight rate, which is equivalent to the
U.S. Fed’s policy rate, any time before then. The BoC’s overnight rate
currently sits at 1%, compared to the U.S. Fed policy rate of 0%, and
this discrepancy has pushed the Loonie higher against the Greenback. Any
additional increases to the BoC’s overnight rate would cause the Loonie
to surge higher still, heaping more suffering on our already
beleaguered exporters. Since our variable-mortgage rates move in lock
step with the BoC’s overnight rate, this suggests that future
variable-rate increases should still be a long way off.
Here is
the key phrase from the Fed’s accompanying press release that is music
to the ears of every Canadian variable-rate mortgage holder (italics
mine):
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that
a highly accommodative stance of monetary policy will remain
appropriate for a considerable time after the asset purchase program
[QE] ends and the economic recovery strengthens.
On
a related note, the latest U.S. non-farm payroll report was issued last
Friday and it reinforced the view that the U.S. employment market is
still taking a long time to heal, in spite of the Fed’s massive and
unprecedented efforts.
The U.S. economy added 162,000 new jobs
last month, which is barely more than the number of new jobs it needs to
create each month just to keep pace with U.S. population growth. There
were also small, downward revisions to the jobs data from the prior two
months, meaning that some of the job-growth momentum that recently had
investors so excited had been overstated. At the same time, both average
earnings and average hours worked fell slightly in July, leaving U.S.
consumers with a little less spending power to deploy as well.
While
the U.S. unemployment rate fell to 7.4%, the lowest it has been in four
years, this was primarily because discouraged workers pulled themselves
out of the labour market and decided to stop looking for work
altogether. The U.S. participation rate, which measures the percentage
of Americans who are either working or actively looking for work,
remains near its all-time historical low. This is important because the
Fed has made it clear that it will only reduce its stimulus programs if
there is “healthy” improvement in the U.S. employment rate. A drop in
the unemployment rate that is caused by an increase in the number of
discouraged workers certainly doesn’t meet that criterion.
GoC
five-year bond yields rose a modest three basis points last week,
closing at 1.75% on Friday. Five-year fixed rates are still offered in
the 3.29% to 3.39% range but borrowers who know where to look can do
better.
Five-year variable-rate discounts are available at rates
as low as prime minus .60% range (which works out to 2.40% using today’s
prime rate). As the competition for variable-rate business continues to
heat up, borrowers are well advised to pay attention to the important
differences in the terms and conditions offered by different lenders.
For example, variable-rate mortgages can be compounded either monthly or
semi-annually, and understanding that devilish little detail can save you money over time.
The Bottom Line: When
the U.S. Federal Reserve suggested last month that it might start
tapering its QE programs as early as September, U.S. and Canadian bond
yields surged higher. Since then, however, the Fed has taken every
opportunity to soften this view, and in its post-meeting press release
last week, the Fed reiterated its renewed, more cautious approach to the
timing of its eventual monetary stimulus withdrawal. As such, I think
our fixed-mortgage rates will stay at or near today’s ultra-low levels
until the Fed starts talking seriously about tapering again, and for the
reasons outlined above, I think our variable rates will remain at
today’s levels for a long time after that.
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
