The month of June came in with a bang – or maybe we should say a pop – considering the 5 year Bank of Canada benchmark bond yield marked its lowest point thus far in 2012 at 1.06 per cent. Over the last 60 business days, we’ve been on quite the rollercoaster ride with the average yield at 1.47 per cent.
Above shows the movements in the Government of Canada 5 Year Bond Yield Benchmark (lighter blue) against RateSupermarket.ca Best Mortgage Rates Page for the 5 Year Fixed Closed Rate (darker blue) over the last 60 business days. No surprise, they move together. The bond yields have begun to turn south again which has brought on a drop in prices today, as the best 5 year fixed rate drops down to the 2.99 per cent level.
Global Economic Update: The GS in PIIGS
Greece’s election results have ruled a pro-bailout majority which will keep the debt-loaded country in the euro zone. The majority in parliament has committed to a $130 billion-Euro EU/IMF bailout to keep the country from claiming bankruptcy. Check back – we’ll have more details to follow today’s G20 meeting in Mexico.
Spain would have really felt the repercussions had Greece’s election turned out different and had they dropped out of the euro zone. Investor sentiment in Spain had improved slightly to start off the day, however bond yields are still sitting at around 7.10 per cent; a level that the other PIIG members had sought help at. Spain’s bond yield has entered a bailout danger zone and unless corrected they may need to ask for foreign financial aid.
Bringing it Home: A Quick Look at the Domestic Picture
Although Canada isn’t attached at the hip to Europe (as we are with the States), there is a tag-along affect that we will feel as the US and the UK (whom we are closely linked to) maintain close ties with Europe. The concern is that Canada could find themselves underwater with debt payments if unemployment spikes. Since Canada is viewed as an investment safe haven on a global scale, investors will continue to turn away from euro zone markets and add more bond-type investments to their portfolios. A surge in demand will drop the bond yields which will lead to an echoed effect to mortgage rates. Yes, we all like cheap credit – but it comes at a cost to the health of the domestic economy.