Why bond yields are closely linked to fixed mortgage rates
I must profess, I’m no expert on bonds. I’ve known for a while that bond yields are closely correlated to fixed rates, but I only recently figured out why this was the case.
First, if you’re not familiar with bonds, check out this excellent explanation of what bonds are. For those of you too lazy to click on the link, basically bonds are like loans: when the Government of Canada “issues you a bond,” you’re loaning money to the government to finance their operations. In return, they agree to pay you interest on the loan you’ve given them.
Technically, a bond is considered a “debt security”, which simply means the government is indebted to you.
The government isn’t the only entity that can issue bonds; companies can do it, too, in order to raise money for whatever it is they need to do.
Mortgage lenders (banks as well as private lenders) work this way — they raise capital by selling bonds. They find investors who have piles of money, issue bonds to those investors, and pay those investors interest. Now the mortgage lender has an even bigger pile of money; they turn around and use it to offer loans to us poor homeowners. And that, in a nutshell, is why bond yields are closely linked to fixed mortgage rates.
As I write this, the GoC benchmark 5-year bond yield has shot up to 2.88 from 2.50-2.64 just last week, meaning private institutions were also forced to offer their investors that much more for their capital. (Government of Canada bonds are considered practically risk-free, since they’re backed by the government; bonds from private institutions are not risk-free, hence investors demand higher interest for lending them money.)
Mortgage lenders wasted no time in passing on that added cost to homeowners, raising their fixed rates. Currently, the Big 5 banks’ 5-year “special offer” rates are at 4.54% or above.
The Market is Overheated: Bob Truman
Most of what you hear out of real estate associations read along the lines of, “the market is always healthy and prices will keep going up.” So it’s refreshing to hear a realtor advise his clients that now might not be the best time to buy:
I’m now telling buyers to wait a couple months. We’re at the peak price for this year, there’s a very poor and limited selection, and there’s not much downside to waiting it out. Many buyers with pre-approvals have a guaranteed interest rate that will still be valid in August. Sure, there’s 3500 SFH listed for sale, but 90% of them are un-sellable at their present price. That’s why there’s such a panic when an attractive new listing shows up. A sales-to-new-listings ratio of 80% is the sign of an overheated market.
We’ll let things settle down for a while. History tells us the average and median prices will start to drop in July, and more listings will be available soon.
Read the post here:
http://www.bobtruman.com/blogs/bob_truman/archive/2009/06/28/it-s-all-down-from-here.aspx
Javascript bookmarks to access Alexa, Compete, and Quantcast
First, the bookmarks. These little pieces of JavaScript will automatically take you to the Alexa, Compete, and Quantcast stats of whatever page you’re currently viewing. Just create new bookmarks in your Bookmarks Bar or wherever, and change the location to the JavaScript.
Alexa:
javascript:(function(){location.href='http://alexa.com/siteinfo/' +window.location.hostname})();
Compete:
javascript:(function(){var%20loc;loc=window.location.hostname; loc=loc.replace(/www./,'');location.href= 'http://siteanalytics.compete.com/'+loc})();
Quantcast:
javascript:(function(){location.href='http://quantcast.com/' +window.location.hostname})();
A bit of background: I switched from Windows to Mac a couple of years ago, and have been using Firefox ever since. Lately, though, Firefox has been thrashing my hard drive, making the whole thing painfully slow.
I’ve switched to Safari, and man is it fast. I installed Glims, which does most of the stuff I missed with Firefox, like undoing the last closed tab, and re-opening tabs from the last session when Safari first starts.
I did miss having an Alexa toolbar — I know Alexa isn’t all that accurate, but at least it gave me some idea — so I wrote these JavaScript bookmarks. Not quite as convenient, but it’s the next best thing.
Now I just need replacements for the Google Bookmarks and Web Developer extensions and I’ll be set.
Still getting more credit card perks, not less
When I saw a letter from BMO MasterCard in the mail today, I was almost certain that they were going to jack up my interest rates, as a lot of the credit card providers south of the border are doing. To my pleasant surprise, they’ve offered to remove the annual fee on my Silver Air Miles card (1 mile for every $20 spent). A quick visit to their website indicates that this isn’t available to just anybody.
However, it’s not exactly a big deal for me, since they’d already done this for me years ago! I haven’t been paying an annual fee for a while now. Looks like they forgot that they gave me the perk already. Still, better than what I was expecting. 
Anecdotal evidence
Normally, I don’t give much credence to anecdotes — sample sizes are too small to be meaningful — but I found this comment by DavidWDesjardins, posted on this CBC news story, extremely interesting:
As a developer of software for realtors, I have a keen insight into the real market. First and foremost the real estate board only comments on the sale of properties, avoiding any numbers regarding presales and assignments.
Assignment resales accounted for nearly 50% of realtors revenue who operated in the downtown core. After the crash, reslaes went into the toilet. These number are never reflected in the boards numbers, The real damage and fallout from this won’t be seen for months to come.
MAC Bulk has made some headway, but the numbers of units moved is a fraction of what they were a year ago.
With our software we also track price reductions. Homes in the 500K range have dropped an average of 14%. Homes in excess of 1.5 million have seen price drops of as much as 30% to get a sale. And don’t get me started on the ultra expensive market. Complete stagnation.
A bit of a laugh from 2005
I found this gem from 2005 while searching for historical real estate prices in Vancouver:
Bursting the bubble myth
By Bruce Benham, Chief Operating Officer of RE/MAX International, Inc.
July 29, 2005We’re all aware of the dramatic headlines proclaiming the inevitable “housing bubble” that will reportedly cripple the real estate industry, and the entire U.S. economy, when it eventually bursts.
But you know better. And I hope your clients do too….
The best part is, at the bottom of the article there’s a button that reads: “Access our market intelligence, contact our team now!”
Bond yields shoot up
As of May 21, 2009, the 5-year GoC bond yield has shot up to 2.26% — the highest it’s been since the beginning of December:
01/12/2008 2.26%
02/12/2008 2.26%
03/12/2008 2.27%
04/12/2008 2.17%
…
11/05/2009 2.07%
12/05/2009 2.10%
13/05/2009 2.09%
14/05/2009 2.11%
15/05/2009 2.13%
18/05/2009 Bank holiday
19/05/2009 2.16%
20/05/2009 2.15%
21/05/2009 2.26%
As you can see from the data above, yesterday’s rate shot up dramatically in one day.
It’s not a matter of if fixed mortgage rates will rise, it’s only a matter of when… and that when is going to be very, very soon.
Fixed mortgage rate update
Looking at the 5-year fixed rates at ratesupermarket.ca, it appears that we’ve hit new lows in May. The lowest rate is now 3.54% with True North Mortgage lenders — down from the 3.69% I was seeing at the beginning of the month.
5-year bond yields have been hovering at the highest level it’s been since the start of the year, so you have to wonder if lenders aren’t going to start getting less competitive with each other once the busy Spring real estate season ends.
Bond yields up again (May 8, 2009)
As of May 8, the GoC 5-year bond yield has jumped to 2.14%, while the 10-year is at 3.16%.
Government of Canada 5-year benchmark bond yield:
Government of Canada 10-year benchmark bond yield:
I can’t see mortgage lenders raising their rates until after the peak real estate season (spring) ends, but they will have to pretty soon after that.
Bond yields up again
5-year BoC bond yield is up to 2.1%, while the 10-year bond is up to 3.14%.
Will be interesting to see how long it takes lenders to raise their fixed mortgage rates.
