Last week’s big news was the U.S. Federal Reserve’s announcement on Wednesday that “economic conditions – including low rates of resource utilization and a subdued outlook for inflation over the medium run – are likely to warrant exceptionally low levels for the federal-funds rate at least through late 2014”.
Point of Clarification: The U.S. federal-funds rate, also called the policy rate, is the U.S. equivalent to the overnight rate of the Bank of Canada’s (BoC). It is the floor rate on which all U.S. short-term interest rates are based. read more…
This quarter’s Mortgage Market Update is a good news/bad news story.
I’m an optimist at heart so let’s start with the good news. Barring a global and systemic financial meltdown, our mortgage rates will probably stay at their current rock-bottom levels for an extended period of anywhere from one to five years.
The bad news is that these ultra-low rates will be the by-product of a massive global deleveraging process, which will be as necessary as it will be painful to the world’s most indebted economies. While Canada will not be at the epicentre of this debt purge and while we are somewhat uniquely positioned to endure the coming downturn (more on that later), we will not be immune from the negative effects that deleveraging will have on global economic growth. read more…
The Bank of Canada (BoC) left its overnight rate unchanged at 1.00% last week, and also released its latest quarterly Monetary Policy Report (MPR). The MPR tells us where the BoC thinks inflation is headed and offers the Bank’s perspective on where the greatest risks to the Canadian economy lie. Regular readers of the MPR can also compare the latest report to previous versions to gauge where the BoC’s views have changed at the margin. read more…
The European Central Bank (ECB) made a bet in December that if they offered unlimited three-year loans to liquidity-starved European banks, those banks would then support ailing euro governments by buying up their bonds and creating enough demand to bring their spiraling bond yields down from the stratosphere. Specifically, they extended more than US$600 billion worth of these loans to 500 banks at a rate of 1% and hoped that the banks would use some of that money to buy-up sovereign debt with yields of 5% or more, locking in a handsome spread for their troubles. read more…
Let’s begin the new year where we finished off the last one – in the euro zone.
After a brief period of calm as the calendar flipped to 2012, bond yields in the euro zone’s vulnerable member states are moving higher again. Most notably, Italian bond yields closed at 7.13% on Friday. This is significant because Greece, Ireland, and Portugal all sought bailouts shortly after their ten-year government bond yields breached the 7% threshold, and Italy’s bond market, the third largest in the world, is simply too big to save. read more…
When the calendar flips to a new year, many of us make resolutions to improve our lives. Judging
by how busy the gyms get during the first three weeks of January, I’d bet that improving physical fitness is the most popular resolution, but improving one’s financial fitness is probably not far behind. To that end, today’s post will offer you a simple mortgage tip to help you lower your interest cost, pay off your mortgage more quickly, and prepare for higher rates at renewal. read more…
Last week the Bank of Canada (BoC) issued its latest Financial System Review (FSR), and its governor, Mark Carney, gave a speech called “Growth in the Age of Deleveraging”. If you’re trying to gauge where mortgage rates are headed, both links are well worth the read.
The bi-annual Financial System Review basically outlines what the BoC is worried about and explains to what degree. Not surprisingly, the report concludes that “the risks to the stability of Canada’s financial system are high and have increased markedly over the last six months”. Here are the highlights: read more…
Would You Save More With a Fixed or Variable-Rate Mortgage? (Rate Simulator – 2011 Year End Edition)
It’s been three months since we last ran scenarios that compare the potential costs of fixed vs. variable-rate five-year mortgages using today’s market rates. Over that period, five-year variable-rate discounts have shrunk from prime minus .70% to prime minus .20% (which is 2.80% using today’s prime rate), and five-year fixed rates have dropped from 3.49% to 3.39% (or better if you know where to look).
The narrowing gap between today’s fixed and variable rates (3.39% vs. 2.80%) makes it harder to decide between them. Do you take the fixed rate because it gives you payment certainty for a premium of only .59%? Or do you bet that the same subdued economic forecasts that are driving fixed rates down will lead to a drop in the variable rate? read more…
Friday’s much-anticipated meeting of European Union (EU) leaders in Brussels was the region’s latest attempt to reassure the markets that its financial crisis is being brought under control. Here are the highlights:
- Twenty-six of the EU’s twenty-seven member countries agreed to limit their future structural deficits to .5% of GDP (the UK rejected this proposal).
- Over-indebted member countries agreed to reduce their debt loads by one-twentieth each year.
- Failure to comply with either commitment will, in most cases, trigger sanctions and penalties.
- Participating countries agreed to submit their budgets to a pan-European body in charge of fiscal oversight to ensure compliance.
- EU members also agreed to boost the IMF’s reserves by another 200 billion euros and to move up the launch date for a new bailout fund, called the European Stability Mechanism, to next summer.
But was it enough to reassure the markets? Based on their initial reaction, the answer appears to be “no”. read more…
On Friday, all twenty-seven leaders from the countries that make up the European Union (EU) will assemble in Brussels to take their latest shot at resolving the region’s financial crisis, which is based largely in the seventeen EU countries that use the euro as their currency (called the euro zone).
If past is prologue, the meeting will end with a press conference where EU leaders announce new measures and declare an end to the current crisis once and for all. The markets will rally around the headline, but as scant details emerge in the coming days, doubt will creep back in, and we’ll be one more whippy rally away from being right back where we started. (Sorry to spoil the ending for you.) read more…
In a financial crisis, bond yields provide a real-time gauge of whether a country’s prospects are getting better or worse. If a country’s outlook is worsening, the market will demand higher yields on its new bond issues and the government will have no choice but to pay. But those higher yields raise a struggling country’s borrowing costs, intensifying the debt burden on its already cash-strapped government. This creates more investor fear, and subsequent bond yields must be raised again, and again, and again. It is a cycle of fear that feeds on itself.
Last week, the yields on the euro zone’s latest round of new bond issues indicated that the region’s financial crisis has reached a new level of urgency. Simply put, the bond-yield gauges for Italy and Spain are now red-lining. Let’s check out the difference in their government bond yields last week versus one month ago: read more…
On Friday of last week Statistics Canada released its October Consumer Price Index (CPI) report on general price changes over the most recent twelve months. It showed that the overall rate of inflation fell from 3.2% to 2.9%, and core inflation (which excludes more volatile inputs like food and energy) fell from 2.2% to 2.1%. A drop in both measures was expected, and while we always keep our eye on the CPI data because inflation and mortgage rates normally go hand-in-hand, remember that the Bank of Canada and the federal government have both told us that changes in inflation won’t drive our interest-rate policy until the economic weather improves. read more…
Concerns over Greek default were set aside last week as Italy took centre stage in the escalating euro- zone crisis.
Italy has $3 trillion of sovereign debt outstanding, which represents the third largest sovereign debt pool in the world and totals more than all Spanish, Irish, Portuguese and Greek debt combined. This large pool of debt must constantly be renewed and refinanced (like when your mortgage comes up for renewal but on a much larger scale!) and therein lies the latest and scariest twist yet in the euro-zone crisis. read more…
I suppose it was inevitable that some of the more aggressive U.S. lending practices would make their way north of the border after our Big Five banks started buying up regional U.S. banks.
It’s probably just too tempting when two-thirds of Canadian mortgage borrowers still walk into their local branch and sign the mortgage contract put in front of them with few questions asked about the fine-print terms and conditions. That kind of blind loyalty has been very profitable for the Big Five over the years.
So why are Canadians always surprised when they learn later that the terms and conditions in their unread Big Five mortgage contracts are so heavily tilted in the bank’s favour?
I’ve provided many examples of what to watch for in previous posts (the whole Borrower Beware section of my blog is devoted to this subject), and today’s post will serve as my latest instalment. I’ll quote two new sections that were recently added to a Big Five lender’s standard charge terms, and then comment on each. (As an added bonus, I’ll also use a legible-sized font that can be read without a magnifying glass.) read more…
Last week’s headlines were dominated by the threat that Greece would put its acceptance of the euro zone’s bailout plan to a public vote, and everyone breathed a big sigh of relief on Thursday when Greek Prime Minister Papandreou thought better of his latest attempt at brinkmanship and took that option off the table. read more…
