Dave Larock in Monday Interest Rate Update, Mortgages and Finance, Home Buying, Toronto Real Estate News
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Today’s post will run shorter than normal because of the elephant in the room.
This
week we will find out whether the U.S. Federal Reserve will in fact
begin to slow, or taper, its massive quantitative easing (QE) programs.
The Fed’s announcement will dwarf all other short-term influences on
mortgage rates and as such, there is not much to talk about until that
announcement has been made.
There is a wide range of opinion about
what the Fed will do. Some experts think that the recent softening in
the U.S. jobs data will push the Fed’s taper timing farther into the
future. Others believe that the Fed is more motivated than ever to end
its current QE programs because of mounting evidence that this massive
balance-sheet expansion is producing very limited benefits.
Only
one outcome seems certain: When the Fed makes its official announcement
this Wednesday, the people who made bets on the wrong side of the Fed’s
tapering decision are going to be in a hurry to cover them, and that
should cause bond yields (and many currencies) to move sharply in
response. The only question now is the direction of the move.
Five-year
Government of Canada (GoC) bond yields were one basis point lower this
week, closing at 2.12% on Friday. Our bond yields have gone up so much
recently that one would normally expect some pullback, but we haven’t
yet seen that. In the meantime, lenders are still playing catch up with
bond yields and that means that five-year fixed rates continue to rise.
Given the potential for significant volatility this week, anyone who may
be in the market for a fixed rate is playing the mortgage version of
Russian roulette if they don’t lock in a pre-approval.
Five-year
variable-rate mortgages are still being offered in the prime minus
0.50% range (which works out to 2.50% using today’s prime rate). Unlike
fixed-rate borrowers, variable-rate borrowers are not subject to the
vagaries of the bond-market sentiment. Instead, their rate is controlled
by the steady hand of the Bank of Canada (BoC), which continues to have
little reason to raise the overnight rate (which variable-rate
mortgages are based on) any time soon. This assumes that almost
non-existent inflation, sluggish growth, sagging employment and
slowing rates of household debt accumulation will still guide the Bank’s
interest-rate path.
The Bottom Line: My guess is that the
Fed will announce a very modest start to its tapering program, but with
plenty of caveats about the pace of any QE wind down being tied to the
continued strength of the economic recovery. That said, just about
anything seems possible this Wednesday. Get your popcorn ready.
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
