Wednesday’s Historic Events Nudge Rates Higher

The Mortgage Report: Jan. 6, 2021

• U.S. 5-year yields leaped to a 7-week high on Wednesday as Democrats took control of all three houses of government, thanks to their historic win in Georgia.
• Canada’s 5-year yield rose in sympathy by a less notable 2 bps, but economists nonetheless expect more of an incline in rates this year. The reason: Democrats are expected to break open the government’s purse strings with $2,000 stimulus cheques, infrastructure spending and an array of other giveaways.
• It’ll be paid for, in part, with gobs of debt. That scares the bejesus out of bond traders (when traders sell bonds, rates go up). There’s no panic by any means, but there’s also less reason to buy U.S. government bonds than there was last week. And Canadian 5-year rates have over a 90% correlation with 5-year U.S. rates.
• Canada’s 5-year/5-year forward rate rose to its highest level since March on Wednesday: 1.21%. That’s where the market expects 5-year yields to be at this time in 2026 — i.e., 79 bps higher than today (and 14 bps below the 10-year average). If that were to theoretically happen, your run-of-the-mill uninsured 5-year fixed rate would land somewhere around 2.50% — far from a catastrophic rise.
• Of course, inflation could exceed or underwhelm expectations by then and push rates significantly higher or lower. It’s best not to guess how things will shake out, especially if you’re a borrower with a tight budget. You may want to focus instead on managing rate risk with a fair penalty fixed rate, and take Wednesday for what it was, a clue that low rates may last “less long” after 2021.

BoC Chatter

• There’s more and more speculation about a “micro-cut” by the Bank of Canada—i.e., a 10-15 bps reduction in the overnight rate. Not coincidentally, two-year yields, which follow BoC policy expectations, hit an all-time low on Wednesday. And the OIS market is pricing in almost a 10-bps BoC cut by year-end, albeit that’s been the case for weeks.
• If we can make it through this early-2021 lockdown without too much more economic destruction, optimism may return and take a rate cut off the table. That remains to be seen.
• In the meantime, none of this chatter is ample justification to go variable on your mortgage. There’s just not enough upfront savings relative to a fixed, and relative to the rate risk ahead in 2022 or 2023. While rate hikes are nearly the last thing on the BoC’s mind today, recessions do end, and rates do revert to their mean.

Case of the Disappearing Credit Score

• This woman’s credit score disappeared, reports CTV News. It went from 670 in May to non-existent in October when she tried to get a mortgage. That seems a bit odd but, “While there is no such thing as a [credit] score of zero…consumers may not be aware [that] after a period of no credit activity, their credit files may become ‘unscoreable,” Equifax told CTV.

Mortgage Bytes

• HSBC, which officially has the lowest mortgage rate in Canadian history, is reportedly so swamped it’s taking 3-5 business days (according to HSBC staff we spoke with) to get back to people who apply online. If you want to reach a human faster—without walking into a branch—the best bet is to phone right when the call centre opens at 9 a.m. ET, we’re told.
• Act now and get a 20-year mortgage at 0%…if you move to Denmark.
• TD cut some posted fixed rates this week:
  • 6-month: 3.09% to 3.04%
  • 1yr: 3.14% to 2.79% 
  • 2yr: 3.19% to 2.94%

The main reason this matters (since few people pay posted rates) is that it jacks up IRD penalties considerably for TD customers breaking their mortgage one to two years before maturity.

Quotable

• “The spectacle of a mortgage and housing agency overtly hostile to home ownership has been all the more bizarre because it is at odds with public opinion and with the expressed objectives of the Government of Canada [namely the First-Time Home Buyer Incentive],” says OREA’s Tim Hudak about CMHC (via The Star).