Mortgage Radar: Bond Yields Up Mortgage Rates Likely to Follow

February 7, 2011

bonds- interest- rates- key-to-understanding-bonds

It looks like we may be moving further away from those all time low fixed rate mortgage rates that we enjoyed over the summer and fall of 2010. Bond prices are falling as investors move their money away from the safe haven of bonds and explore higher yield options in the investment market place. This results in bond yields increasing which compresses the spreads on fixed rate mortgages and will likely trigger an increase by the end of this week to fixed rate mortgages. The optimism comes mostly from the job numbers announced last week. While overall Canada came up short on jobs and Flaherty sees little hope for a jobless 2011 somehow investors took a cue from higher than expected gains for January.

Capital Economics, a leading macroeconomics consultancy, released a report last week warning that an increase to the prime rate could spark a housing price collapse. The report claims that as the bank of Canada raises interest rates, mortgages will become more expensive for Canadians. Add inflation to the mix, and Capital Economics predicts prices could fall 25 per cent over the next few years. Reminiscent of the 1989 crash.

Interestingly at the same time last week CD Howe called for a reduction of CMHC’s role in insuring high risk mortgages in Canada.  They claim that by insuring mortgages which add up to approximately 30% of the Canadian GDP they are exposing Canadian tax payers to “ill defined risks”.

Concern grew at the end of 2010 because debt to disposable income levels grew to 148%. This report from CIBC suggests that the alarming number was due to falling incomes in the July-September compared with the April-June quarter — when Canadians were getting juicy tax refund cheques from Ottawa — not because debt levels were rising. The report goes on to indicate that in fact household debt was at the lowest level in 9 years during the 4th quarter of 2010.

That wraps up The Mortgage Radar for this week. If you have any questions about the content or would like to get a mortgage broker like myself working on your behalf please call me at 416.461.0204ext2 or e-mail me.


Christopher Molder

Mortgage Broker

Christopher is a mortgage broker based in Toronto, Canada. And a son of a broker too. He’s a second generation mortgage broker. Following in his father’s steps he joined the family mortgage business straight out of university.