Government of Canada Yield Curve flatenned since April 2010… flatenning means the long term bond yields decrease more than short-term yields… in fact short term yields on treasuries rose in direct response to increase in Bank of Canada rate in June & July 2010.
Flatenning of yield curve is a sign of weak economic outlook and tame inflation. The economic outlook in Canada has deteriorated since April 2010… Last week’s release of Canadian economic indicators – wholesale sales, retail sales & consumer price index – were less than forecast
Source: Bank of Canada
Flatenning yield curve has the effect of reducing medium to long-term borrowing costs for business and households… E.g. – The 5-year fixed mortgage rate is priced relative to the 5-year Government of Canada bond yields which are currently at 2.4%… Usually the spread is about 120-150bps… which would mean the 5-year fixed mortgage rate should be about 2.4+1.5 = 3.9%… the best posted rate is about 4.25% … so if you are negotiating a mortgage be sure to use this and other research from here & here
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Mainstream media & real-estate agents in Canada (& US alike) have been pushing the idea of all-time low mortgage rates to pump the real-estate market. Are mortgage rates really that low? The chart below does prove that the posted 5-Year Fixed Rate Mortgage (orange line) is indeed at historic lows since 1980s.
Source: Bank of Canada
Is 1980s considered historic lows? May be… the Bank of Canada Interest rate from 1955 to 1980 averaged about 7% and from 1935 to 1955 about 2% which is higher than the 2009 average of 0.75%… I know this rate is more applicable to variable rate mortgages but nevertheless it helps to analyze the possible situation back then.
A Fixed Rate mortgage is one where the interest rate does not change for the term (not amortization) of the mortgage i.e. the interest rate if fixed for the term.
On the other a variable rate mortgage is one where the interest rate on the mortgage or the mortgage rate changes whenever the reference or the benchmark rate changes. In Canada the reference rate is always the Prime Rate; in US it is either the Prime Rate or the LIBOR.
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Yesterday I posted a 10-year chart showing the difference between the Bank Rate which is set by Bank of Canada and the Prime Rate which is set by the chartered banks and is the rate the banks will lend to their most creditworthy customers.
Today I bring to you the same chart but going back since 1935… that’s right, the relationship between Bank Rate & Prime rate since 1935!
The spread is clearly at historic lows compared to the earlier half of 20th century but relatively high compared to the latter half
Source: Bank of Canada
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