Canadian Bond Yield Up Across The Board

April 29, 2008

Canadian interest rates

The steady increase in Canadian’s bond yields over the past weeks may be interpreted as indications that interest rates may not stay low for long. Even though the Bank of Canada slashed the trend setting Bank Rate half-a-per-cent age point on April 22, the weekly bond yields have gradually returned to a more normal spread.

The spread for bond yields had stayed flat for almost a year as a result of inversion of the interest rates. The days apparently are over for shorter term mortgage rates for 1 and 2 years term at about the same rates as for 4 and 5-year term terms. For home owners who once enjoyed lower 1 year rate, may once again witness the return of 1 year rate being the lowest comparing with longer 2, 3, 4 or 5-year rates.

Enjoy the low rates while you can

The projection by RBC Economics on Canadian bond rates for the next few quarters heading higher also point to higher interest rates at the end of the 2008 or early 2009. Most prime borrowers are expected to be paying “Prime minus mortgages” at around 4.0%. Home owners who favour varaible mortgages throughout their mortgage terms can be expected to benefit from lower interest rate mortgages than fixed term mortgages.

What to expect when rates a heading up?

But, based on past consumer behaviour, most home owners will abandon their variable rate mortgages and lock-in on fixed term mortgages when the Bank rate is heading higher eventually. Most will end up paying more for their mortgages. Canadian Banks are not obligated to give away the best discounts to their borrowers when they lock-in their mortgages. The discounts borrowers get below their bank posted rates may range from 0.75% to 1.25%. These rates are 0.2% to 0.7% higher than the best “discounted rates” the banks can offer.

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