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Amid Inflation Scare, Rates Dive on Deflation Scare

July 19, 2021
5 mins
Inflation Scare

Is inflation a threat or not?

Investors believe it has been for months, but Monday's bond market action suggests rates may have overreacted to the fear of runaway prices.

Canada’s 5-year yield, which drives fixed mortgage rates, plunged the most since April 2020. Getting the blame are global growth fears (thanks largely to spiking Delta COVID cases), plummeting oil prices and a diving stock market. When stocks tank, worried investors buy bonds for "safety." That drives down yields because bond prices and rates move in opposite directions.

Yields-plunge

Unfortunately, profit margins on fixed rates aren’t exactly fat. So, unless we see a further yield crash, the chances of banks slashing rates near-term aren't good.

That said, some of the most competitive lenders could shave fixed rates a few whiskers (e.g., 5 bps or so). That's assuming there’s no quick rebound in yields.

Following Monday's performance, the bond market is pricing in one less Bank of Canada rate increase in the next two years, for three hikes total. That compares to four implied hikes last week. (Market rate projections change with the wind, so don’t put too much weight on this.)

Looking three years out, which is always dangerous, the market is pricing in 4-5 hikes. That's according to "interest rate swap" pricing from Bloomberg. (Swaps are a way for traders to hedge or bet on interest rate direction.)

Five BoC rate increases is the approximate breakeven point whereby today’s best 5-year fixed and 5-year variable rates result in roughly the same projected interest cost "on paper," over a full five-year term.

Today's Lowest 5-Year Fixed RatesUpdated 18:08 ET on Jul 29, 2021

Rates are based on a home value of $400,000

card image
1.54%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
Nov 27
card image
1.54%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
Nov 27
card image
1.58%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
Oct 28

In Other News...

Family Trumps Professionals

Where do people go when they need financial advice? According to a new J.D. Power survey, people turn to family and the internet more than professionals. 36% consult family members and 31% search for answers on the internet. Banks/credit unions are #3 at 25%.

Too Liberal with Inflation?

“…central banks are becoming more tolerant of inflation overshoots,” says Capital Economics. That’s a threat because it “increases the risk of policy shocks” and because “high asset prices are increasingly being underpinned by the expectation of continued ultra-low real interest rates.”

Realtors Say They Dislike Blind Bidding

According to a new iPro Realty poll, 64% of Realtors say offer transparency should be mandatory when buyers bid on homes. 41% of the Realtors say offer transparency could at least partly cool Toronto’s frothy real estate market.

Stat of the Week

“Insured mortgages now account for just under 35% of all outstanding mortgages in Canada, down from more than 50% five years ago,” says TD Economics. The government is accomplishing its mission to "reduce" taxpayer exposure to mass insured mortgage defaults. Then again, that outcome was an actuarially tiny risk to begin with, one that was more than adequately offset by insurers' huge (stress tested) capital reserves.

Rob McLister

Rob McLister has been informing mortgage consumers and professionals since 2007. In that time, he’s written more than 2,500 mortgage stories for publications ranging from the Globe and Mail — where he presently serves as mortgage columnist — to the National Post, Maclean’s, Canadian Mortgage Trends and RateSpy.com. Regularly quoted throughout the media, Rob is a committed advocate of greater transparency in the mortgage industry. He’s also been a vocal consumer advocate for more sensible mortgage regulation. In 2011, he launched two mortgage fintechs: mortgage comparison website RateSpy.com and digital mortgage broker intelliMortgage Inc. The former is the go-to source of Canadian mortgage news and the only site comparing all publicly advertised prime mortgage rates. The latter is Canada's leading online mortgage provider for self-directed borrowers. Both companies were acquired in 2019 by RATESDOTCA Group Ltd.

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