Dave Larock in Interest Rate Update, Mortgages and Finances
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The U.S. Federal Reserve has most investors convinced that it will raise its policy rate at its meeting this Wednesday (Fed futures prices are currently giving an 88.6% probability to a 0.25% Fed policy-rate rise).
When this happens, will U.S. bond yields rise? And will their Canadian equivalents and our mortgage rates get taken along for the ride?
That depends.
Bond-market investors won’t be taken by surprise when the Fed raises on Wednesday because it has telegraphed its next rate move effectively. Left on its own, the Fed policy-rate hike might actually push U.S. bond yields lower because markets tend to buy the rumour and sell the fact. The real impetus for the next move in U.S. bond yields will come from the Fed’s accompanying statement.
Investors will be quick to react to any perceived change in the Fed’s expected policy-rate path and since bond yields around the world react to U.S. bond yield movements, there will be reverberations across the globe.
Bluntly put, if the Fed statement is interpreted as being increasingly hawkish about additional rate increases, expect Government of Canada (GoC) bond yields and our five-year fixed mortgage rates to move higher, at least initially, as investors shoot first and ask questions later.
That said, over the longer term, I continue to believe that the Fed will raise its policy rate more slowly than its rhetoric indicates. Here are five reasons why I say that:
While the week ahead could be an eventful one for our fixed mortgage rates, Canadian variable-rate borrowers can watch this week’s Fed drama safe in the knowledge that their rates aren’t likely to be moving in either direction for some time yet.
Our variable rates will move when the Bank of Canada (BoC) adjusts its policy rate, and the Bank is expected to keep a steady hand on its tiller regardless of any Fed-led changes in bond yields. In fact, the BoC will be happy to see a Fed policy-rate hike and more hawkish Fed policy-rate language because both should weaken the Loonie against the Greenback, and would thereby provide further stimulus to our underperforming export sector.
That said, if fixed mortgage rates rise the cost of converting from variable to fixed will increase – so variable-rate borrowers should still be paying attention to this week’s developments.
Five-year GoC bond yields rose ten basis points last week, closing at 1.27% 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. If you are looking to refinance, you 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 you.
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. If you are looking to refinance, you 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 you.
The Bottom Line: Investors won’t be surprised if the Fed raises its policy rate this week, but if it also sounds more hawkish in its accompanying press statement, U.S. bond yields should rise and their Canadian equivalents with them. If that happens, our fixed mortgage rates will increase. To protect against that risk, anyone who is in the market for a fixed-rate mortgage is well advised to lock in a pre-approval in the meantime. Forewarned is forearmed.
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