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Could bonds pull mortgage rates down even more?

RITA TRICHUR Toronto Star:    Falling bond yields could spur a slight drop in medium-term residential mortgage rates this summer, but bargain-hungry consumers would be foolish to count on considerably cheaper borrowing costs, experts say.

About a month ago, banks blamed soaring bond yields for two sizeable hikes to key residential mortgage rates.

Those moves drove up posted rates on five-year fixed-rate loans by 60 basis points to 5.85 per cent. 

While yields have reversed course in recent weeks, banks have yet to pass on those savings to consumers. Meanwhile, there are fresh signs of life in the housing market, fuelling increased demand for mortgages.

Some economists and rate strategists believe that yields could fall a bit further and speculate that mortgage rates might follow suit. But there are no guarantees and experts surmise those potential declines would be minimal at best.

Doug Porter, deputy chief economist at BMO Capital Markets, says banks will be more inclined to tweak their rates if yields continue heading south

Typically, they want to be convinced that it is not a flash in the pan and that any retreat in yields is sustained,” he said.

“I believe that we are probably not too far away from that point. It might take a little more of a deeper rally (in bond prices) to make it completely convincing.”

Bond yields move inversely to prices. While variable-rate mortgages are largely influenced by the banks’ prime rates, conventional fixed-rate mortgages are linked to the bond market.

Banks generally try to match maturities when they finance mortgages with bonds. That means five-year mortgages are paired with five-year bonds.”


Charmaine’s comment:  I have highlighted certain phrases, as can be seen by the above article, banks are fast to increase their fixed rates when the bond rate increases however are very slow to reduce them as cited by Doug Porter of BMO Capital Markets, “they want to be convinced that it is not a flash in the pan and that any retreat in yields is sustained”.  

Also note the decrease in the premium on the variable rate from a couple of months ago:

Today I can offer you Prime plus 0.20 – most of the bank’s are at prime plus 0.40 – 0.60!

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