How do Bond Rates affect Mortgage Rates
Banks use bond rates to hedge their lending activity. As bond rates go lower, then they can offer lower interest rates to clients. As bond rates increase, then mortgage rates will rise as well. Bond rates are based on the equity markets. As equities, such as stocks and options, decrease in value, then more people will move there money into bonds. This causes bond rates to decrease in value with supply and demand rules. As more money is transferred out of bonds back into equities, then bond rates will rise once again. As the bond rates move up and down, so do the mortgage interest rates.
Recent Bond Rate Trends
There are two types of bonds that affect the mortgage rates the most, marketable bonds and benchmark bonds. Both marketable and benchmark bonds move in conjunction with each other. If one type of product and term increases, then the other types or products and terms move in correlation.
The Government of Canada marketable bonds, average yield, 3-5 year had the following results over the last ten years:
Average Rate: 4.22%
High: 6.52% on January 19, 2000
Low: 1.43% on March 18, 2009
Since March 18, 2009, Government of Canada marketable bonds, average yield, 3-5 year have moved up from 1.43% to 2.56% as of June 8, 2009. This is an 80% increase in only a few short months. Mortgage rates have increased only from 3.5% approximately to 4% on a 5 year fixed. These rates could easily move up a lot faster as well.
The second type of bond rates is Govt. of Canada benchmark bond yields: 5 year
These bond rates have had the following results over the last ten years:
Average Rate: 4.28%
High: 6.50% on February 9, 2000
Low: 1.52% on January 14, 2009
Since January 14, 2009, Govt. of Canada benchmark bond yields: 5 year have moved up from 1.52% to 2.71% as of June 8, 2009. This is a 78% increase in only a few short months as well.
Both the marketable and the benchmark bonds show a dramatic increase in fixed rates in the coming month. At these rates, it is possible to see the mid 4% on mortgage rates once again.
What does the Future have in store for Mortgage Interest Rates?
As the bond rates rise, so does the fixed rates. Usually the fixed rates have a few week lag period behind the bond rates due to the banks hedging practices; however, if the interest rates move up or down too quickly, then the banks can be forced to make more dramatic changes in the interest rates.
The best way to protect yourself against rising interest rates is by getting one or even multiple pre-approvals with the lowest mortgage interest rates possible. Make sure to try to get pre-approvals that have a long time frame to use them to keep your options open. Also, as interest rates rise, less and less home buyer’s will enter the market which usually causes property values to go down as well. By having a good pre-approval, and excellent timing, you can pick up some very good deals.
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