The Canadian economy is currently in a period of gloom, yet for most mortgage-holders, that gloom isn’t all that bad. As the debt yield on a five year bond drops, the cost of financing a loan drops as well. The yield has continuously dropped since 2018, and as of this Monday, it was holding at a mere 1.45%. That’s significantly low, as the rate hasn’t dropped so far since mid summer of 2017.
It’s important to note that as of last week, and inversion of the yield curve (in regards to short term versus long term (lending)) occurred. The event is one that is incredibly rare, and has even been used to predict recessions in recent times.
According to Benjamin Tal, an economist at CIBC, “There’s all kinds of technical forces, and it is not necessarily the case that tomorrow we’ll have a recession… The yield curve slowing down is a clear signal… We have a conflict between the stock market, which is more optimistic, and the bond market which is more pessimistic.”
To put this into perspective, bond yields are dropping because of those with the ability to maintain significant investments. When investors start to believe that the economy isn’t doing so great, interest rates start to move significantly lower.
According to Janine White, mortgage borrowers benefit from lower bond yields, however, it’s “not a good sign from an economic standpoint.”
In a move that rivals were intent upon matching, the Royal Bank of Canada lower its posted rate to 3.74 per cent. A move that is representative of an entity attempting to lure in more borrowers. The Royal Bank dropped their rate twice since that time. As of March first, it dropped 10 basis points. As of March 13, it dropped 15 basis points. The rate is now holding at 3.49 percent.
Variable rate loans are dropping significantly as well, just for separate reasons. When a mortgage is of variable stature, it tends to follow what the Bank of Canada is currently doing. As they are expected to start lowering their rates, these variable mortgage rates are expected to start dropping as well.
According to White, “There’s an increase in the probability that they will actually cut to try to fuel economic growth.”
According to Beata Caranci, TD Bank’s chief economist, “One of the biggest shifts that occurred in our quarterly March forecast was the removal of any further interest rate hikes from our outlook… We hit the stop button.”
The spring has always been a significant time for the Canadian economy, and 2019 is no different.