When will mortgage rates rise again? Follow the bond market for clues

Posted on 06. May, 2010 by in General

Andy Holloway, National Post
Published: Tuesday, May 04, 2010

Only a die-hard optimist doesn’t see higher mortgage rates coming down the line. The question is when? For a clue, take a look at what’s happening in the government bond market. When bond traders believe the Bank of Canada is going to hike its overnight lending rate, yields on long-term bonds start to inch up, usually two to four months in advance. The fixed mortgage rates at banks follow quickly.

Banks generally follow bond yields on almost a one-to-one basis, says Benjamin Tal, senior economist at CIBC World Markets. They want to maintain a healthy spread between what they can secure money at and what they can sell it for in the form of mortgages. (It should be noted that the Bank of Canada overnight lending rate does affect variable mortgage rates.)

With that in mind, it shouldn’t have come as any surprise that most big banks hiked their posted five-year mortgage rates 60 points to 5.85% in late March; the yield on the benchmark five-year government bond had jumped almost 50 points to 2.9% during the previous seven weeks. Of course, mortgage rates don’t change every day as bond yields do. Banks only change their rates when bond yields have had a steady movement one way or another. And there are exceptions, such as when a bank starts a price war for customers.

But since March 29, bond yields have continued to inch their way up. Anyone want to bet mortgage rates will rise, too?

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