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.
Earlier this year, banks were confronted with a sharp spike in their own borrowing costs. Yields jumped after a flurry of better-than-expected economic data. At that time, traders were also focused on the threat of inflation as governments issued massive amounts of debt to stimulate growth.
Central banks usually try to control inflation by raising interest rates and the market was betting the U.S. Federal Reserve would hike rates this year.
That sentiment, however, has since soured.
Last week’s disappointing U.S. jobs report is among a string of more recent indicators that dampened earlier expectations of a snappy recovery.
The yield on the five-year Government of Canada bond peaked at 2.82 per cent on June 10. Yesterday, it closed at 2.39 per cent. Experts say it is impossible to predict how much lower it could go.
“I think most of the juice has been wrung from this move. I would still say the risk is that yields could fall a bit further, but I think we’re well past halfway,” said Eric Lascelles, a rates strategist at TD Securities.
Benjamin Tal, CIBC’s senior economist, thinks another 5 to 10 basis-point decline in yields is likely. He agrees that might cause mortgage rates to dip but believes the discounts will be minimal and short-lived. “By the end of the year, we’ll start seeing rates rising.”
Mark Chandler, a senior fixed-income analyst at RBC Capital Markets, stressed that other factors also influence mortgage rates, including higher demand and recession-driven risk premiums.
Even if rates don’t budge, they remain near historic lows, observed Jim Rawson, Toronto regional manager at mortgage brokerage Invis.
“I know that people are so rate-conscious these days, but really when it comes down to what (falling yields are) really going to mean for you on a monthly basis – it is really nothing
RITA TRICHUR Toronto Star