How U.S. Debt Fears Could Lower Canadian Mortgage Rates
Canada is in a unique post-recession position. The fact that our nation weathered the financial crisis better than most and has taken steps toward recovery makes us an attractive option for global bond investors – meaning our cost of borrowing actually benefits from global economic turbulence.
A Boost For The Bond Market
That’s just what’s happened this week, as increasing volatility in the U.S. drove investors back to the shelter of “safe haven” Canadian government bonds, pushing yields slightly but steadily lower in the short term. As of today, five-year bonds are yielding 1.86 per cent, down from 1.89 last week and 19 basis points lower than 2.05 per cent four weeks ago. Ten-year yields are now at 2.54, a 17-point decline from last month’s levels of 2.71 per cent. And, while lenders are much slower to lower their mortgage rates than raise them, we have seen a moderation of five-year fixed mortgages this week, down to 3.24 per cent from 3.47 per cent on our discounted mortgage rates table.
The Emotional Market Reaction
This renewed popularity is somewhat of a reversal from last month’s trend, when these very same investors dropped bonds due to speculation over U.S. QE tapering, driving yields and mortgage rates higher in the U.S. and Canada.
This is a good example of the curious emotional relationship between economies and markets. Now, with a lingering U.S. government shutdown and looming debt ceiling on October 17, investors are looking for the safest place to put their money – hence the flow into Canadian coffers.
This is despite the fact that if the U.S. does indeed hit their ceiling, these same bonds run the risk of default. However, investors are banking on the fact that there’s too much at stake for congress to allow ceiling fears to come to fruition. In a report released this Wednesday, the U.S. Treasury department addressed just how severe the consequences would be if it did, stating:
“The U.S. dollar and Treasury securities are at the center of the international financial system. A default would be unprecedented and has the potential to be catastrophic: credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”
Variable Rates To Remain Low For Some Time
While fixed interest rates may be kept low by flush government bonds, national monetary policy is unlikely to change in the U.S or Canada any time in the near future. All fears of a quantitative easing taper seem out the window in the U.S. – it’s highly unlikely that the Fed would stir that pot as a debt crisis looms. According to the Investment Outlook released this month by Pimco Founder and Co-CEO Bill Gross, investors would be wise to bet that they won’t for quite some time – even after the taper has come and gone.
On the homefront, weak economic growth keeps our policy makers’ hands tied. This week, the Bank of Canada’s Senior Deputy Governor Tiff Macklem stated that a cut to our economic forecast is warranted, as the exporting industry and business investment fail to fill the gap left by stemmed consumer household spending. He says our growth will likely be in the 2 – 2.5 per cent range this year, before warming up in 2014 – lower than the previous 2.8 per cent forecast for 2013. To sum things up, all signs point to no change in the BoC’s rate announcement on October 23, and likely zero movement until well into next year.