Posted by: Daryl & Wendy Ashby | October 30, 2010

Yield Bounces from the Depths

The world’s most prominent fixed income investor, Bill Gross, has predicted the end of the 30-year bull market in bonds.

His call may be early and he is but one man, but bond traders took note as they sold off treasuries.

From a mortgage perspective, events that impact bonds can be viewed in two separate timeframes: the short term and the long-term.

The long-term impact is near-impossible to judge because random events often intervene. Currently, the bond market is worried about the ballooning U.S. debt burden, as well as a U.S. Fed that’s printing hundreds of billions of inflationary dollars to kickstart the American economy. (Gross called U.S. debt and monetary policy a “Ponzi Scheme” earlier today.) But that doesn’t mean something else—like weak output—won’t counterbalance this inflationary phenomenon.

The above ties in with Canadian mortgages because of how tightly correlated US yields are to Canadian yields. As bonds sell off south of the border, Canadian yields typically rise, as least for a while. This lifts fixed mortgage rates.

In the short-term, technical factors will drive trading to a large degree. Market technicians believe bonds are “overbought” and displaying a reversal pattern. The long-term concerns mentioned above, and better-than-expected economic numbers (like consumer confidence), have been a catalyst for this reversal.

5-year-yield

Whether the climb in yields continues is yet to be seen. The 5-year yield hit a 1-month high today. It’s up 22 basis points from last Wednesday’s low. If it jumps another 10 basis points or so, deep-discount fixed rates could reverse higher.

This reversal is immediately relevant to people that need to lock in a rate in the next 30-60 days. Barring another Greek-style default panic (which is making renewed headlines again in case you haven’t seen) the odds are fairly good that yields won’t drop much lower in the near term.

For that reason, if you need a fixed rate approval in the next 1-2 months, it would be logical to get a rate guarantee sooner, rather than later.

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