Five-year fixed-mortgage rates moved higher last week as lenders continued to respond to the recent run up in Government of Canada (GoC) bond yields, which have risen from a low of 1.13% on May 1, 2013 to a high of 1.63% on June 12, 2013.

Fixed-mortgage rates have been at ultra-low levels for a long time, so it’s not surprising that the vast majority of borrowers have been opting for the comfort and familiarity of the ‘banker’s favourite’ five-year fixed term (here is a post I wrote that explains why I call it that). But after the recent increases to five-year fixed rates, I think there is an increasingly compelling case to be made for the variable rate instead.

Here are five reasons why I think the five-year variable rate is worth a fresh look: read more…

Last Friday the latest Canadian employment report was released by Statistics Canada and it smashed expectations. Not surprisingly, bond yields shot higher on the news and lenders increased their five-year fixed-mortgage rates shortly thereafter.

Let’s start by taking a look at the highlights from the latest employment report that got everyone so excited:

• Our economy added a total of 95,000 new jobs in May. This is the second highest single-month result in the last thirty-five years (the highest was 95,100 new jobs in August, 2002).
• Ontario accounted for roughly half of the new jobs with more than 50,000 new positions created.
• The private sector accounted for almost all of the new jobs, adding 94,600 net new positions.
• 76,700 of the new jobs were full-time positions.

The immediate investor response to this employment report was predictable. Markets are made at the margin and an employment report that comes in ten times higher than the consensus forecast can certainly be expected to push bond yields higher over the short term.

Investors were quick to speculate that a surge in our monthly employment data may be a signal that our labour market is entering a tightening phase. Since there is an 80%+ correlation between rising labour costs and rising inflation, higher interest rates won’t be far behind if this tightening trend comes to fruition. But does this sudden spike in employment signal the onset of higher inflation or is it just a one-off blip? read more…

When the Bank of Canada (BoC) met for the last time before Governor Carney leaves for the Bank of England, it did not change its interest-rate bias as I had speculated that it might in last week’s post. In fact, the BoC’s commentary was a little more general and more vague than usual.

In the end, the Bank favoured a steady-as-she-goes approach as it begins to transition from outgoing Governor Carney to incoming Governor Stephen Poloz. With that in mind, I think it’s unlikely that Governor Poloz will make any significant changes to the Bank’s monetary policy right off the bat – so it now looks like the BoC’s upward interest-rate bias will be with us for a while yet.

The big story relating to Canadian mortgage rates last week was the continued surge in our five-year Government of Canada (GoC) bond yields, which have risen 33 basis points over the past month (from 1.15% on May 1, 2013 to 1.48% at close of business last Friday). To put that current yield level in perspective, over the past 12 months the five-year GoC bond yield has remained below 1.50% on all but a handful of days and we haven’t breached the 1.50% threshold since mid-February. read more…

When the Bank of Canada (BoC) meets this Wednesday I think there is a good chance that it will remove the interest-rate tightening bias that it has kept in place, in one form or another, for more than a year now.

Simply put, the cost of maintaining that tightening bias now clearly outweighs the cost of removing it. read more…

Anyone keeping an eye on Canadian mortgage rates should pay close attention to the Consumer Price Index (CPI) which is released monthly by Statistics Canada. The CPI tells us whether average prices have increased or decreased over the past twelve months, and over time, changes in the CPI influence Bank of Canada (BoC) monetary policy more than any other economic measurement.

Before looking at the details in the latest CPI (released last Friday), let’s highlight a few phrases from the BoC’s oft repeated inflation-control strategy, which it includes at the front of each Monetary Policy Report (MPR).

• At the heart of its inflation-control strategy, the BoC believes that “that the best way to foster confidence in the value of money and to contribute to sustained economic growth, employment gains and improved living standards is by keeping inflation low, stable and predictable”.
• Further to that point, the BoC’s inflation-targeting approach is symmetric, meaning “that the Bank is equally concerned about inflation rising above or falling below the 2 per cent target”.

As you will see in a moment, that last phrase is critical in the current context. If the BoC’s monetary policy actions are primarily governed by the goal of steering inflation towards 2% over time, then current CPI trends clearly imply that the BoC’s next move in its overnight rate should be a decrease, rather than the increase it has repeatedly warned us about. read more…

Anyone keeping an eye on Canadian mortgage rates should pay special attention to our Labour Force Survey (commonly referred to as our ‘employment report’), which is released by Statistics Canada each month.

The Survey gives us a bevy of useful information about whether and where our economy is adding jobs, whether average incomes are rising or falling, and whether the average worker is putting in more or less  hours of work each month. Together, these factors combine to give us valuable insight into where our overall economic momentum is headed.   read more…

There will be no Update this week. (I ran the Toronto marathon yesterday and spent the rest of the day in recovery!)

Back next Monday.

Today’s consensus on mortgage rates goes something like this: Central banks around the world are printing money like crazy in an attempt to stimulate (and reflate) their economies and to keep their governments (and in many cases their banks) from going broke. All of this ‘new money’ will eventually lead to higher inflation and when it does, higher mortgage rates will inevitably follow.

I agree with this general premise but it omits the most important detail – when. read more…

The Bank of Canada (BoC) left its overnight rate unchanged last week, as expected.

The Bank also released its latest Monetary Policy Report (MPR), which I read with great interest because it gives us the BoC’s views on the state of the world’s economies and includes projections for where the Bank sees foreign and domestic economic momentum headed over the next several years.

In a perfect world, the MPR would offer an unbiased assessment but bluntly put, that has not been the case for some time now. The BoC remains primarily concerned about our elevated household debt levels and continues to warn Canadian consumers about higher future interest rates. The Bank’s hope is that this form of ‘moral suasion’ will help counteract the natural effect that its ultra-low interest-rate policy is having on household borrowing. If successful, the BoC would be able to continue stimulating the rest of our small, open economy, which is needed in light of current global economic conditions, without fueling a household credit bubble as a by-product. read more…

Since the start of the Great Recession, Government of Canada (GoC) bond yields have been consistently pushed lower by wave after wave of troubling economic news from beyond our borders.

GoC bonds are part of a shrinking pool of available safe-haven assets and as economic fear and uncertainty have increased, so has the premium that international bond-market investors are willing to pay for those assets. Since our ever popular fixed-mortgage rates move in close relation to GoC bond yields, this fear premium has created a significant interest-cost saving for the majority of Canadian mortgage borrowers. read more…

The latest Canadian and U.S. employment reports were released last Friday and the data in both came in well below expectations.  

U.S. and Canadian employment data should always be counted among the most important economic indicators for anyone keeping an eye on where Canadian mortgage rates are headed. In normal times, this is primarily because rising labour costs have an 80%+ correlation with rising inflation which then leads to higher mortgage rates. But in today’s world, the employment data in both countries take on an even greater significance. Here’s why: read more…

Cyprus is a tiny country that accounts for only 0.2% of the euro zone’s economic output and its finances are broken beyond repair.

Given its small size, the temptation to use Cyprus to set a tough new precedent for future euro-zone bailout proposals is understandable. This is especially true for German Chancellor Angela Merkel, who will stand for re-election in September and who needs to re-establish her austerity-at-all-cost credentials with German voters after repeatedly compromising on bailout deadlines for the euro zone’s larger countries.

From that perspective, last weekend’s bailout proposal was just what the Chancellor Merkel’s political strategists ordered. It came with the toughest bailout provisions yet, including an unprecedented requirement that Cypriot deposit accounts with balances of less than 100,000 euros be charged a one-off tax of 6.50%. read more…

Long time readers of my Updates will remember that last year I was writing about how our ultra-low mortgage rates were partly a by-product of rising investor fears of a euro-zone collapse.

The Bank of Canada (BoC) was loath to raise its overnight rate in the face of so much global uncertainty and our Government of Canada (GoC) bonds were in high demand as capital fled into a shrinking pool of safe-haven sovereign debt. Canadian fixed- and variable-rate borrowers alike were taken along for the ultra-low rate ride. But then European Central Bank (ECB) President Mario Draghi stared down Spanish and Italian bond-market vigilantes with his promise to “do whatever it takes” to save the euro zone and the crisis retreated from the headlines and appeared to calm from a boil to a simmer.

While I haven’t written about the euro-zone crisis for a while, it is still far from over. In fact, thanks to the latest bailout plan for Cyprus, it is back on the front pages today.  read more…

Bond-market yields yo-yoed last week, with more subdued comments from the Bank of Canada (BoC) pushing them down last Wednesday before strong employment reports from both the U.S. and Canada pushed them higher on Friday.

When the BoC met last week, it kept its overnight rate unchanged at 1.00% as expected. In its accompanying commentary the Bank softened its interest-rate guidance once again, saying that “the considerable monetary stimulus currently in place will likely remain appropriate for some period of time, after which some modest withdrawal will likely be required”.

Here are my key takeaways from the Bank’s latest statement: read more…

Statistics Canada released its latest round of GDP data last Friday and it provided further confirmation that our economy is hovering at just above stall speed.

The report showed that our GDP actually declined by 0.2% in December, bringing our fourth quarter GDP growth to a paltry 0.6% on an annualized basis. While our economy registered total GDP growth of 1.8% over the full year, our momentum slowed markedly in the second half.

As we piece together each new data point in our evolving economic picture, signs of deceleration are everywhere. Our latest GDP, employment and inflation reports merely confirm, at a macro level, the slowdown that we see in housing starts, factory shipments, exports, retail sales and so on.

None of this should really come as a surprise. Every major economy in the world has faced its own growth challenges since the start of the Great Recession. While we weathered the initial storm better than most, our small, open economy could not reasonably be expected to operate above trend indefinitely. read more…