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Last week was an interesting one for five-year Government of Canada (GoC) bond yields, which our five-year fixed mortgage rates are priced on.
We started the week with GoC bond yields falling in sympathy with their U.S. counterparts as investors re-evaluated their bets that the Trump presidency would lead to higher growth and inflation. Thus far, President Trump has focused on his anti-immigration and protectionist trade policies and not on his promises for fiscal stimulus and tax cuts.
Investors must also be wondering how much, if any, political capital President Trump will have left once he is done fighting with the courts over his Muslim ban and after he gets through the Senate confirmation hearings for his cabinet appointees. Mind you, when the people you nominate to head the education and labour departments and the Environment Protection Agency have all publicly called for the elimination of the same departments they are now tasked with leading, contentious confirmation hearings shouldn’t come as a surprise.
President Trump’s erratic behaviour also raises geopolitical instability risks, and this too is exerting downward pressure on bond yields because capital flows towards safe-haven assets, like bonds, in uncertain times.
Against that backdrop, we received the latest Canadian employment data, for January, on Friday. The headline came in much higher than expected for the second straight month and Canadian mortgage borrowers are now speculating about whether this continuation of stronger-than-expected employment data might trigger another round of mortgage rate increases.
To help answer that question, let’s start by looking at five key highlights from the latest Canadian employment data:
- The Canadian economy added another 48,300 new jobs in January. This smashed the consensus forecast that we would actually lose 10,000 jobs in January, as economists predicted that we would give back some of the 71,000 new jobs that were added in December.
- Our economy added both full-time (15,800) and part-time (32,400) jobs, and while the service sector led the way with 42,600 new jobs created, the goods-producing employment sector added 5,600 new jobs as well.
- The private sector added 32,400 new jobs in January, but our self-employed ranks also grew by 8,200 jobs and public sector employment expanded by 7,700 new jobs as well.
- Our official unemployment rate fell from 6.9% to 6.8% for the month. That drop was less than it would otherwise have been because as employment prospects improve, disenfranchised workers who had previously given up looking for a job decide to re-enter the labour market. To that end, our workforce expanded by 31,000 in January.
- Interestingly, our economy’s recent impressive run of job creation has not yet led to a rise in labour costs. Average hours worked fell by 0.5% in January and average hourly wages for full-time employees fell by 0.3% last month as well. Given that, it is unlikely that the Bank of Canada (BoC) will alter its most recent assessment that there is “still significant slack in the labour market”, or more broadly, its forecast that our output gap, which measures the gap between our economy’s actual output and its maximum potential output, will not close until mid-2018. As a reminder, the BoC would be expected to begin raising interest rates at about the same time that our output gap closes.
In summary, while another month of stronger headline employment growth is an encouraging sign for our beleaguered economy, I don’t think it will push GoC bond yields to a level that will trigger more increases to our fixed mortgage rates.
This view is based on several factors. Over the short term, our newly created jobs aren’t fueling a rise in labour costs, and I continue to believe that the U.S. bond market has overestimated what the Trump-effect will be on U.S. inflation and growth rates. More significantly over the longer term, aging demographics in most of the developed world will help ensure that there is continued demand for income-producing assets, like bonds while high debt levels will restrain growth and, as a by-product, keep inflation in check.
Five-year GoC bond yields were active this past week. They started at 1.11% on Monday, dropped to 1.01% by Wednesday and bounced back up to 1.09% where they closed on Friday. Five-year fixed-rate mortgages are available at rates as low as 2.44% for high-ratio buyers, and at rates as low as 2.49% for low-ratio buyers. Borrowers who are looking to refinance should be able to find five-year fixed rates in the 2.69% to 2.84% range, depending on the terms and conditions that are important to them.
Five-year variable-rate mortgages are available at rates as low as prime minus 0.80% (1.90% today) for high-ratio buyers, and at rates as low as prime minus 0.60% (2.10% today) for low-ratio buyers. Borrowers who are looking to refinance should be able to find five-year variable rates in the prime minus 0.45% range (2.25% today), depending on the terms and conditions that are important to them.
The Bottom Line: We saw lots of volatility in GoC bond yields last week, which led some to speculate that higher fixed mortgage rates may be imminent. I don’t share that view, for the reasons outlined above. At times like this I am reminded of Benjamin Graham’s observation that the markets act like a voting machine over the short term but like a weighing machine over the longer term. Looking past the current volatility, I think that any weighing machine still indicates that both our bond yields and our mortgage rates will remain at or near today’s levels for the foreseeable future.
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, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave
February 13, 2017Mortgage |