Posts Tagged ‘bond yields’
When Will Mortgage Rates Fall?
As we’ve seen the spreads on the bond yields increase, the question of “when are rates coming down?” has been asked a lot! Earlier in the year when volumes were low, volumes for the banks were also low. During Spring Market the race for obtaining 2009 market share was on! Profitability was taking a back seat to market share and we saw very competitive rates from the banks. They were treating a mortgage as a loss leader to get that client in the door. Some also had extra deposit money from RRSP season to lend out. Now into the third quarter of 2009, profitability is again top of mind. Remember year end for the banks is Oct 31. They only have 4 months left to hit their revenue targets. Therefore, we are now seeing banks hanging onto this higher spread for as long as they can….there may be some movement soon, but banks are ensuring bond prices stay consistent before they make a move.
Possible Rate Increase…..
The TSX was down about 280 points this morning, but surprisingly bond yields have not followed. In fact the 5 year bond is yielding 2.26 which is up from 1.94 just four weeks ago. What does this mean? Well, if bond yields continue to increase this will result in the banks making less money on the spread between their current low mortgage rates and the rate of the 5 year bonds. As we all know banks are not in business to make less money so they will increase their mortgage rates to keep profits up. I explained in an earlier post how the bank's make money on mortgages, but I will recap briefly. I stated the bank's "spreads" are decreasing. Let's assume your bank is currently lending money for mortgages at 3.80%. This would result in their "spread" (or profit) being 3.80-2.26=1.54%. The bank has two choices, they can lend you the money or they can invest the money in a 5 year bond and make 2.26%. If they lend you the money they need to be compensated for the extra risk of you defaulting on the mortgage, plus they need to cover the cost of administeringyour mortgage over the next ...
