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The Elephant in the Room

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What the Latest U.S. and Canadian Economic News Means for Canadian Mortgage Rates
September 9, 2013
The U.S Fed Trades Short-Term Gain for Longer-Term Pain
September 23, 2013
Last updated on November 7, 2017
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  • Monday Morning Mortgage Rate Updates
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toronto mortgage ratesToday’s post will run shorter than normal because of the elephant in the room.

This week we will find out whether the U.S. Federal Reserve will in fact begin to slow, or taper, its massive quantitative easing (QE) programs. The Fed’s announcement will dwarf all other short-term influences on mortgage rates and as such, there is not much to talk about until that announcement has been made.

There is a wide range of opinion about what the Fed will do. Some experts think that the recent softening in the U.S. jobs data will push the Fed’s taper timing farther into the future. Others believe that the Fed is more motivated than ever to end its current QE programs because of mounting evidence that this massive balance-sheet expansion is producing very limited benefits.

Only one outcome seems certain: When the Fed makes its official announcement this Wednesday, the people who made bets on the wrong side of the Fed’s tapering decision are going to be in a hurry to cover them, and that should cause bond yields (and many currencies) to move sharply in response. The only question now is the direction of the move.

Five-year Government of Canada (GoC) bond yields were one basis point lower this week, closing at 2.12% on Friday. Our bond yields have gone up so much recently that one would normally expect some pullback, but we haven’t yet seen that. In the meantime, lenders are still playing catch up with bond yields and that means that five-year fixed rates continue to rise. Given the potential for significant volatility this week, anyone who may be in the market for a fixed rate is playing the mortgage version of Russian roulette if they don’t lock in a pre-approval.

Five-year variable-rate mortgages are still being offered in the prime minus 0.50% range (which works out to 2.50% using today’s prime rate). Unlike fixed-rate borrowers, variable-rate borrowers are not subject to the vagaries of the bond-market sentiment. Instead, their rate is controlled by the steady hand of the Bank of Canada (BoC), which continues to have little reason to raise the overnight rate (which variable-rate mortgages are based on) any time soon. This assumes that almost non-existent inflation, sluggish growth, sagging employment and slowing rates of household debt accumulation will still guide the Bank’s interest-rate path.

The Bottom Line: My guess is that the Fed will announce a very modest start to its tapering program, but with plenty of caveats about the pace of any QE wind down being tied to the continued strength of the economic recovery. That said, just about anything seems possible this Wednesday. Get your popcorn ready.

I am an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact me or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Dave the Mortgage Broker
Integrated Mortgage Planners
David Larock - Mortgage Broker
Integrated Mortgage Planners Inc.
DBA: TMG Integrated Mortgage Planners Inc.
FSRA License #12867
2 St. Clair Avenue West, 18th Floor
Toronto, ON M4V 1L5

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