Posted by: Daryl & Wendy Ashby | May 20, 2010

Plunging Confidence Drives Down Rates

Nothing spooks financial markets like uncertainty and risk, and it shows in today’s bond yields. Jumper

The 5 year yield (which influences 5-year fixed mortgage rates) is down strikingly in the last 30 days. It dropped another 12 basis points today.

In less than a month, yields have tumbled 62 bps. That’s the biggest one-month drop since December 2008.

A glut of negativity is herding investors into the safety of bonds (and driving down yields), including:

To get a sense for the perceived financial system risk out there, take a look at LIBOR. LIBOR is the rate at which banks lend unsecured funds to each other. It’s risen 29 of the last 30 days.

The good news definitely seems sparse beyond Canada’s borders, but fear is often fleeting. While the current market environment is grim, sentiment may be considerably different next week.

Today’s concerns must also be set against a strong rebound in Canadian economic performance. When the problems above are resolved, the BoC will likely resume focus on Canada’s robust domestic indicators.

Going forward…

  • Most analysts still expect a rate hike come June or July.
  • However, traders have removed some of their bets for a Bank of Canada move on June 1. Financial futures peg the probability of a June hike at roughly 50/50.
  • Fixed rates may drop a bit more. This morning, RBC cut its 5-year rate by 11 bps. Other banks should be right behind.
  • Barring further changes, the new mortgage qualifying rate will be 5.99%, effective May 31.

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Sidebar:  The last time 5-year yields were this low was March 5. Posted 5-year fixed rates were 5.39% at the time. Today they’re 5.99%—60 bps more! Granted, there’s more of a risk and rate-hike premium built into today’s rates, but 60 basis points seems extreme

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