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Why CDN Bond Yields Have Been So Volatile and What This Means for CDN Mortgage Rates – Monday Morning Interest Rate Update (October 20, 2014)

by Dave Larock

Mortgage Rate ConceptWhat a difference a few weeks can make to the outlook for Canadian mortgage rates.

In the middle of September, our benchmark five-year Government of Canada (GoC) bond yield had surged thirty basis points to 1.73%, hitting its highest level since July, 2013.The mortgage market braced for the first across-the-board hike in five-year fixed mortgage rates this year, but then in less than a month, five-year GoC bond yields plummeted to 1.38%, marking their lowest level since May, 2013.

This heightened volatility was essentially the bi-product of a particularly intense fight between fear and greed in the hearts and minds of investors. In today’s post, I’ll outline why greed won a battle or two, and why fear is still winning the war. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why CDN Bond Yields Didn’t React To Our Latest Employment Surge – Tuesday Morning Interest Rate Update (October 14, 2014)

by Dave Larock

Mortgage Rate ConceptWe received the latest Canadian employment report last week, and it showed a surprising surge in job creation. Our economy grew by a whopping 74,000 jobs in September, more than tripling the consensus estimate of 20,000 new jobs which were forecast for the month.

Government of Canada (GoC) bond yields would normally be expected to rise in response to a sharp increase in employment demand. Rising demand pushes labour costs higher over time, and the cost of labour is a key driver of broader inflation. But five-year GoC bond yields actually fell slightly on Friday after the latest employment data were released. While this may not seem intuitive, a closer look at the employment data will help us to better understand the market’s reaction: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the Latest U.S. Employment Data Mean for Canadian Mortgage Rates – Monday Morning Interest Rate Update (October 6, 2014)

by Dave Larock

Mortgage Rate ConceptWe received the latest U.S. employment data last week and they showed that the U.S. economy added 248,000 new jobs in September, well above the 215,000 new jobs that the consensus was expecting.

Once again though, beauty is in the eye of the beholder.

Those who think that the U.S. economy is well on its way to recovery noted that it has now created an average of 224,000 new jobs per month over the last three months. This run rate is well above the 150,000 new jobs that U.S. economy must create in order to keep pace with U.S. population growth and the natural expansion of the U.S. labour force. Furthermore, all of the pickup was in full-time positions, where 671,000 new jobs were added, while part-time positions fell by 384,000. The broader U6 unemployment rate, which includes part-time workers who would prefer to work full time, fell once again from 12% to 11.8%, and the average workweek expanded to 34.6 hours, the highest it has been since the start of the Great Recession. David Rosenberg noted that this expansion in hours worked was equivalent to adding another 400,000 new jobs to the U.S. labour force. If this trend continues, U.S. employers will be forced to create more jobs because their existing employment base can only be stretched so far.       read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Running But Not Empty – Monday Morning Interest Rate Update (September 29, 2014)

by Dave Larock

Mortgage Rate ConceptThis week’s post will be short and sweet because I spent the weekend running the Ragnar Adirondacks Relay Race with six of my close friends. We ran 197 miles (317 kilometres) non-stop over approximately 30 hours and were the first of 329 teams to cross the finish line (although staggered start times meant we were not necessarily the fastest team). Everything broke right for our motley crew, which included a five-time iron man, a sub three-hour marathoner and a Boston qualifier. We held together despite a mix of physical challenges for our runners leading up to the race, including a knee injury that required surgery, a partially torn hamstring, and a kidney infection, which makes it hard to process the lactic acid your body produces in abundance when you run six different legs on no sleep!

Congratulations to the runners of Boston Connection on a job well done.

Five-year Government of Canada bond yields fell eight basis points last week, closing at 1.63% once again on Friday. Five-year fixed-rate mortgages are available in the 2.79% to 2.89% range, and five-year fixed-rate pre-approvals are offered at rates as low as 2.94%.

Five-year variable-rate mortgages are available in the prime minus 0.80% to prime minus 0.65% range, depending on the terms and conditions that are important to you.

The Bottom Line: With last week’s drop in bond yields, the threat of an imminent rise in fixed mortgage rates has subsided for the time being. That said, financial markets are still uneasy and volatility can reappear quickly. Stay tuned.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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U.S Fed Chair Yellen Buys More Time and Bank of Canada Governor Poloz Makes Me Do a Double Take – Monday Morning Interest Rate Update (September 22, 2014)

by Dave Larock

Mortgage Rate ConceptIn today’s post we’ll focus on comments made last week by both Bank of Canada (BoC) Governor Poloz and U.S. Fed Chair Janet Yellen.

The U.S. Federal Reserve’s Latest Guidance

The U.S. Fed offered its latest market guidance last week using both its post-meeting formal statement and accompanying press conference comments from Fed Chair Janet Yellen.

The Fed finds itself in an increasingly difficult position when issuing policy statements, as I detailed last week. In essence, its delicate choice of words must prevent any rise in irrational exuberance while at the same time not triggering a spike in bond yields by disrupting markets with overly hawkish language around the timing of its future interest-rate hikes, as it has done previously.

Here are the highlights from the Fed’s latest communications: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Is a Short-Term Spike in Fixed-Mortgage Rates Coming? Monday Morning Interest Rate Update (September 15, 2014)

by Dave Larock

Mortgage Rate ConceptWhen the U.S. Federal Reserve meets this week, it is expected to adopt a more hawkish interest-rate stance in response to improving U.S. economic data. If that happens, U.S. bond yields will continue their recent rise and, given that Canadian bond yields have moved in lock step with their U.S. counterparts for some time now, an increase in our five-year fixed mortgage rates may follow.

The U.S. Fed finds itself in an increasingly difficult position. On the one hand, the Fed continues to tie its ultra-loose monetary policies to the strength of the U.S. labour market recovery, and the U.S. employment data still leave much to be desired. On the other hand, jobs data usually act as lagging indicators during recoveries, and other U.S. economic indicators seem to indicate that the U.S. recovery is now on a more solid footing. There is growing concern that the Fed will end up behind the curve if it waits much longer to start raising short-term interest rates. This could stoke inflation and ultimately force the Fed to raise rates sharply to catch up, dealing a harsh blow to U.S. economic momentum in the process.

The Fed also has an ongoing credibility issue to worry about. It has moved the goal posts it uses to estimate the timing of its next policy-rate increase several times already, and the longer the Fed waits, especially in the face of improving U.S. economic data, the more investors come to expect low rates to continue indefinitely.

To counteract this, over the past several years, every time U.S. investors become increasingly complacent about the threat of higher rates the Fed has issued some sort of warning to act as a check on group-think bubble psychology. This has triggered a short-term spike in bond yields that has been accompanied by tremors in the equity markets, followed by a ‘clarification’ from the Fed that then backtracks on its more hawkish language. If past is prologue, we should expect the same pattern to unfold this time. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Latest Employment Data and Bank of Canada Comments Bolster Low Rates for Longer View – Monday Morning Interest Rate Update (September 8, 2014)

by Dave Larock

Mortgage Rate ConceptLast week had several interesting developments with implications for Canadian mortgage rates. For starters, the Bank of Canada (BoC) met last Wednesday and, as expected, announced that it would keep its overnight rate unchanged at 1%. (Reminder: Our variable rates are priced using the BoC’s overnight rate).

Here are the highlights from the BoC’s accompanying statement, with my comments in italics:

  • The Bank continued to attribute the recent spike in our inflation to “temporary factors”. In other words, it reconfirmed that it will not alter its monetary policy in response to what it sees as a short-term development.
  • “The global economy is recovering largely as expected”, but the European recovery has weakened, largely as a result of the situation in the Ukraine. I think the European recovery has been vulnerable throughout and that it was only a matter of time before a new spark relit the crisis anew. The Ukraine file may well be that next spark.
  • “In the United States, a solid recovery seems to be on track.” Is it just me or would that statement be a lot more reassuring without the word “seems” in it? Probably a prudent hedge though, given that the U.S. recovery has been in a pattern of two steps forward, one step back for some time now. The latest U.S. employment data released last week are a recent case in point. After several months of strong job creation, the August data showed that the U.S. economy only added 142,000 new jobs last month, well below the 230,000 new jobs the consensus was expecting.
  • “Canadian exports surged in the second quarter”, largely as a result a cheaper Loonie. “This pickup will need to be sustained before it will translate into higher business investment and hiring.” The Bank is encouraged by this development but it is holding its applause until surging export demand proves sustainable and convinces businesses to jump in with both feet.
  • “Activity in the housing market has been stronger than anticipated.” Our level of concern about the housing market is rising along with its incremental demand. Federal Finance Minister Oliver take note.
  • “The Bank still expects excess capacity in the economy to be absorbed during the next two years.” The BoC has repeatedly linked the timing of its next overnight rate increase to our economy’s return to full capacity, so the Bank is hinting that it expects to start increasing its overnight rate at some point over the next two years – although that two-year window gives it a wide margin of error to work with.

On an overall basis, the BoC maintained its wait-and-see monetary-policy approach and continued to keep investors squarely on the fence about whether its next interest-rate move will be up or down. Put another way, the Bank’s message was that it will respond to material changes in our economic momentum when it sees them, but that it doesn’t see them yet. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why Bank of Canada Governor Poloz’s Words Are Music to the Ears of Every CDN Mortgage Borrower – Tuesday Morning Interest Rate Update (September 2, 2014)

by Dave Larock

Mortgage Rate ConceptLast week we learned that Canada’s gross domestic product (GDP) grew by 3.1% in the second quarter, well above the 2.5% GDP growth that analysts were expecting, and a big improvement on the 0.9% GDP growth we saw in the first quarter of this year.

With both inflation and GDP growth now surging, anyone keeping an eye on our mortgage rates might be surprised to learn that Government of Canada (GoC) bond yields, which our mortgage rates are priced on, remain very close to the bottom end of their trading range over the most recent twelve months.

This is due in large part to recent comments from Bank of Canada (BoC) Governor Stephen Poloz. For example, he recently reassured bond investors that the factors that have pushed our Consumer Price Index (CPI) higher of late would prove transitory. He was proven partially right when the most recent CPI data, for July, showed inflation receding slightly from 2.4% to 2.1%. Then, a week before the latest GDP data were due to be released, Governor Poloz gave an interview at the Jackson Hole Economic Symposium in which he said that even if our economy took off “like a rocket … it would still have room to grow”. In other words, he believes that our economy can absorb substantial increases in demand without it being at risk of overheating. Armed with that guidance, market reaction to the latest GDP upside surprise last Friday was muted, with the Loonie actually closing 0.22 cents lower on the day. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The U.S. Fed’s Latest Insights and What They Mean for Canadian Mortgage Rates – Monday Morning Interest Rate Update (August 25, 2014)

by Dave Larock

Mortgage Rate ConceptGone are the days when central bankers act as invisible hands, which nudge economies back toward states of equilibrium as needed.

Since the Great Recession first sent shock waves that still echo today throughout the global economy, central bankers have taken centre stage. They now use their mighty (and bloated) balance sheets to purchase huge quantities of not just bonds, but also stocks. Central bankers now set the price for so many asset classes, either directly through outright purchases or indirectly through interventionist monetary policies, that these days, they are effectively the only game in town.

Did you know that the U.S. Federal Reserve, the Bank of Japan and the Bank of China have purchased 90 percent of all new U.S. Treasuries issued so far this year? In an ironic twist, central banks have become concerned about their balance sheets being stuffed with so much low-yielding debt (of their own making) and in response, many are now purchasing equities in an attempt to diversify. Much like investors, central bankers want to reduce the risk that higher future inflation rates and consequent higher interest rates will trigger huge losses. But these market elephants can’t just wade quietly into the equity markets to balance their portfolios. Their tracks leave deep marks wherever they tread. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why Central Bankers Want Higher Inflation and What This Means for CDN Mortgage Rates – Monday Morning Interest Rate Update (August 18, 2014)

by Dave Larock

Mortgage Rate ConceptThese days, both the U.S. Federal Reserve and the Bank of Canada (BoC), along with many other central banks in charge of monetary policy for the world’s largest economies, want higher inflation. That’s because in many cases, their inflation rates hover in the 2% or less range – perilously close to the zero, which puts outright deflation well within reach if a recession or another economic shock hits.

In today’s post I’ll explain why the U.S. Federal Reserve and the BoC are actively rooting for above-target inflation and I’ll outline the implications for borrowers who are trying to decide between fixed and variable mortgage rates. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The Continuing Struggles of the Canadian Labour Market – Monday Morning Interest Rate Update (August 11, 2014)

by Dave Larock

Mortgage Rate ConceptLast week ended with another disappointing Canadian employment report.

Statistics Canada estimated that we gained only 200 new jobs in July. The details in the report showed that we lost 60,000 full-time jobs and generated almost the same number of new part-time jobs to take their place. Not surprisingly, average wage growth continued to sputter along, struggling to keep pace with inflation.

If you’re looking for a silver lining in what was a mostly dark-cloud report, consider that we added 11,500 new manufacturing jobs last month, at least temporarily reversing the steady erosion of jobs in that sector (which has shrunk by approximately 15,000 over the past year). Also, average hours worked increased for the month, which might be an early signal of rising demand for labour if there is any follow through in the coming months.

The Canadian dollar fell on the news, and while that will help make our exports more competitive over the long run, the immediate impact will be higher import prices.

Over the short term, a cheaper Loonie increases the cost of materials and equipment that our manufacturers must import for use in their production processes. The benefits of a more competitive currency are taking longer to accrue, and may not actually fuel a labour-market recovery when they materialize. Our export manufacturing sector was devastated by the Great Recession and its recovery won’t just be a matter of existing companies ramping up production in response to recovering demand. Many of our export manufacturers shuttered their businesses altogether and, while we are seeing the first signs of recovery in this sector, there is no guarantee that tomorrow’s export manufacturers will be as labour intensive as yesterday’s were. The Phoenix that rises from these ashes may look very different indeed.

Five-year Government of Canada bond yields rose by five basis points last week, closing at 1.51% on Friday. Five-year fixed-rate mortgages are available in the 2.79% to 2.94% range and five-year fixed-rate pre-approvals are offered at rates as low as 2.99%.

Five-year variable-rate mortgages are available in the prime minus 0.75% to prime minus 0.60% range, depending on the terms and conditions that are important to you.

The Bottom Line: Our employment data are consistent with an economy that is struggling to create real momentum and it is hard to envision any meaningful uptick in fixed and variable mortgage rates until that changes.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Tuesday Morning Interest Rate Update (August 9, 2014)

by Dave Larock

I am on a family vacation this week.

As you read this I may be zip-lining, mountain biking or trail running in some of the most beautiful parts of Canada.

Here’s hoping I make it back in one piece!

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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A Look in the Rear-View Mirror – Monday Morning Interest Rate Update (July 28, 2014)

by Dave Larock

Mortgage Rate ConceptLast week was a relatively slow one on the mortgage-rate news front so I thought I would use today’s update to highlight several of the posts I have written since the inception of this blog – which now includes 230 posts and counting.

Most Popular

Some of my most popular posts focus on mortgage contract terms and conditions that are often buried deep within your mortgage documents . If life were fair, many of these clauses would be printed in boldface font and come with flashing lights next to them:

This post explains how lenders calculate fixed-rate mortgage penalties. Many readers are surprised to learn that the Big Six banks charge penalties that are often four or five times higher than those assessed by many other lenders.

When I wrote “Why I Won’t Sell Mortgage Insurance”, I got a call from a mortgage life insurance company telling me that I had to take the post down because I wasn’t a licensed insurance advisor and therefore wasn’t entitled to offer an opinion on the product. (I didn’t.)

This one explains how one large Canadian lender imported an aggressive U.S. lending tactic – and this lender is also the only one in Canada that uses collateral mortgage charges on standalone fixed-rate mortgages, a technicality which I explain is good for banks but bad for customers.

My variable-rate simulations tend to draw a significant amount of interest as I try to look into my murky crystal ball to divine whether a fixed or variable rate might save some money over the next five years. (I’m due to post an updated version soon.)

Interest-Rate Commentary

If you’re going to write about where interest rates may be headed, I think you earn your credibility when you go against the grain and offer a view that challenges conventional wisdom (provided your theories are well researched and supported). Here are some examples of where I took that risk: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why Is Higher Inflation Pushing Our Bond Yields Down? Monday Morning Interest Rate Update (July 21, 2014)

by Dave Larock

Mortgage Rate ConceptRising inflation would normally be expected to push bond yields and mortgage rates higher.

Inflation erodes the purchasing power of money over time, so if investors believe there will be more of it, they will demand a greater return on their money in order to ensure that their expected future profits are protected.

At least, that’s how it is supposed to work in economics class.

When Statistics Canada released its latest Consumer Price Index (CPI) last Wednesday, a funny thing happened. Despite the fact that the latest report, for June, showed average prices rising by 2.40% on a year-over-year basis, Government of Canada (GoC) bond yields fell on the news.

That’s strange because this was the second month in a row that the rise in our CPI has come in higher than the 2.00% inflation target that is used by the Bank of Canada (BoC), and our inflation rate now stands at its highest level in more than two years. While there are many economic indicators that influence the direction of bond yields at any given time, very few are as important as the rate of inflation in the CPI. So why didn’t bond yields surge higher on the news? read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the Latest Weak Employment Data Mean for Canadian Mortgage Rates – Monday Morning Interest Rate Update (July 14, 2014)

by Dave Larock

Mortgage Rate ConceptLast Friday’s Canadian employment data came in much lower than most economists had predicted. In fact, the latest consensus jobs forecast was equivalent to calling for sunny skies and getting a torrential downpour instead.

Here are the highlights, or more aptly put, the lowlights from our latest employment data:

  • The Canadian economy lost 9,400 jobs in June – nowhere near the 20,000 new jobs that the consensus had called for.
  • Some analysts are saying that the silver lining in the latest report is that while we lost 43,000 part-time positions for the month, we added 33,500 full-time positions. I would call that a reach when you consider that we lost a total of 60,000 full-time jobs in April and May, leaving our economy 30,000 full-time jobs lighter over the second quarter of 2014.
  • Most of the newly created jobs have been in part-time positions during the past year, and the majority of job growth over this period has been in either the public sector or in ‘self-employment’ (which is considered a soft job category because it often includes workers who are actually in the midst of a job transition). On an overall basis, our economy needs to add about 20,000 new jobs each month in order to keep pace with our population growth, and we have averaged about 6,000 new jobs per month over the past year.
  • The continued erosion of our manufacturing sector is of particular concern. We lost 10,600 manufacturing jobs in June, and Ontario was hardest hit, shedding another 13,600 manufacturing jobs over the month.
  • Economist David Rosenberg observed that the ratio of manufacturing employment in Canada relative to the U.S. sank to its lowest level in thirteen years in June, and BMO economist Doug Porter noted that Ontario manufacturing employment has now shrunk to its lowest level since 1976. As a reminder, manufacturing jobs are of particular importance to our economic health not only because they trigger a powerful multiplier effect, which spurs job creation across our broader economy, but also because they tend to be higher paying.

So what do our latest employment data mean for Canadian mortgage borrowers? read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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