of bond market Code red is flashing in our economy.
It could cut borrowing costs for millions of Canadians by the end of next year and is a stark warning of what could happen.
What we’re talking about here is the yield curve, which has a compelling track record of predicting recessions and falling. mortgage interest rate.
What is Yield Curve?
Think of it as a graph. degree of interest, or the yield varies based on how long you lend to the government. People looking at the curve often look at the difference in yield between the 10-year note and his 2-year note, or the “spread.”
Long-term yields are generally higher than short-term yields (reflecting the higher risk of long-term lending). Not today.
As we speak, the 10-year yield is almost 100 basis points below the 2-year yield. that’s abnormal. (A basis point is a hundredth of a percentage point.) In fact, it hasn’t happened in over 30 years, the last time it happened in his early 1990s, the longest recession since the Great Depression.
A reversal in 10-year and 2-year yields is not a sure signal, but a deep reversal of the type we see today is very reliable. Basically, the market is yelling that Canada will probably go into recession in 2023.
What it means for the mortgagee
By this time next year, GDP could well be negative for two or more quarters and the unemployment rate could rise significantly. The Bank of Canada’s answer to a recession is almost always the same: rate cuts. The only thing I’m not sure about this time is when it will happen.
The market expects that to happen next December, but inflation has run amok. Instead, rate cuts could be his talk for 2024 if core inflation doesn’t drop enough.
Either way, the bond market suggests now is not the time to stick to long-term fixed mortgages. In fact, short-term fixed rates are good at this point in the interest rate cycle for eligible borrowers who can handle interest rate risk.
Unfortunately, like the Canadian yield curve, the mortgage interest rate curve is also inverted. His 1-year fixed minimum uninsured is now a whopping 5.89%. This is 60 bps above the lowest 5-year fix.
Interestingly, however, putting all of this into an interest rate simulator, and assuming the bond market is correctly predicting another 50 basis points or more rate hikes, after that Even if interest rates fall in the second half of 2023, the current inflated 1-year fixed rate still makes sense. This means that the 5-year hypothetical borrowing cost is still the lowest compared to all other conditions.
This is also due to the expectation that the renewal amount can be lowered by the end of next year.
Going fixed for a year may sound good in theory, but there are risks here. If Bank of Canada rate hikes don’t keep inflation in check quickly enough (which I think it does), this particular short-and-reset strategy will doomed to failure.
A two-year lock is therefore a more conservative strategy. Interest rates can’t be reset anytime soon, but today’s lowest he’s 35 basis points cheaper than he was in a year. (This is based on his 5.54% offer of uninsured from HSBC, which leads all lenders nationwide.)
Interest rates plunge this week
Optimism about lower inflation is pushing bond yields lower. This resulted in lower fixed interest rates for mortgages on all terms except 1 year fixed.
The nationally advertised minimum one-year fixed rate actually rose by 20 bps this week amid expectations of rising overnight rates as demand for one-year maturities increased. What a convenience given that it is the most logical theoretical term for risk-tolerant borrowers at this point in the interest rate cycle.
For default insured fixed mortgages, the situation looks better: 4.99% or less over a period of 1 to 5 years. As always, check our online rate sites for better local offers.
Rates in the attached table are Thursday rates from providers who advertise their rates online and rent in at least nine states. The premium rate applies to those purchasing with a down payment of less than 20% or switching an existing insured mortgage to a new lender. Uninsured interest rates apply to refinancings and purchases over $1 million and may include applicable lender interest rate premiums. Providers with different rates in different states will be shown the highest rate.