*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[Leondros]

Originally Posted by bizaro86

Mortgage rates are based on the current five year yield, not based on a banks internal expectations for future interest rates. They do an asset/liability match and lock in the spread over the mortgage period.

So a five year mortgage will be mostly funded with 5 year money of some sort (Canada mortgage bonds, bank 5 year debt, 5 year GICs, etc).

The current 5 year GoC rate is down to 3% from its recent peak. It got over 3.8% in October, so fixed mortgage rates have followed it down somewhat.

Longer mortgage rates are lower than shorter mortgage rates right now because the yield curve is inverted.

And what are those typical 5 year yields typically based off of? Projected yields or interest rate expectations

[Qwerty]

Originally Posted by blankall

3 years fixed at 4.79% is a pretty solid decision IMO. You're only paying 1.4% more than you were, and should hopefully be in a position to get a lower rate in 3 years.

From what I've seen most banks are offering much better rates for a 5 year term than a 3 year term, as they want to get people locked in at a high rate for a longer term. You were able to negotiate a solid rate for a three year term.

As for variable vs. fixed, variable rates are currently at about 1.25-1.5% higher than fixed ones. So in your case, with a 3 year mortgage, you'd need to see some pretty quick drops (like 1.5% in the next 1.5 years or so) to not come out at about the same with fixed.

My assumption is that the gov't will drop rates when all the COVID 5 year fixed come up for renewal in 2024/2025 to avoid a housing collapse. I think if there are drops they come in 2024/2025 at the earliest. Who knows though, I seem to be wrong more often then not!

[Sylvanfan]

Originally Posted by Leondros

Most the main bank's curves would have to be projecting year 4 and 5 below the 3.5% range to get to a 4.2% 5 year fixed.

Honestly if year 5 is in that range and even 4, I'd be quite pleased. The guessing game is when and how much will they drop in the next 24 months.

Same lender would only go to 5.3 on a 3 year fixed.

As I say I suck at life...so I'll just make the wrong decision anyways.

[blankall]

Originally Posted by Qwerty

My assumption is that the gov't will drop rates when all the COVID 5 year fixed come up for renewal in 2024/2025 to avoid a housing collapse. I think if there are drops they come in 2024/2025 at the earliest. Who knows though, I seem to be wrong more often then not!

I see them dropping earlier than that. How quickly they drop will depend on how quickly the inflation data improves, which, as of right now, is improving faster than expected.

Plus no government wants to be in power, or worse up for election, when you have a bad combo of high housing costs and high interest rates.

With current rates of 4.2ish%, you likely won't see a total collapse in the housing market, just a lot of pissed off voters stretching their budgets. I see rates gradually dropping to the 3ish% range over the next 2-3 years.

That being said, I have inherent bias, as I'm one of those people who signed a massive covid mortgage for a super cheap rate.

[Fuzz]

Why are you guys talking like the government sets interests rates for political reasons?

[albertGQ]

Originally Posted by Mr.Coffee

And a very critical point- it’s a riskless 5% return.

Pretty good if you ask me.

And its tax free as well. That's another bonus

Edit: Qwerty already mentioned 5% after tax

[bluejays]

Question about interest rates and inflation. Stats say that inflation in Canada is at 5% but is coming down fairly rapidly. We know that inflation numbers include a variety of things more than just food, but supply chain issues and whatever is causing food prices to be very high, are still very present. Even if inflation drops to 3% this summer, how are food prices still so high in reality and how can we say inflation is only 3% when food and gas seems much higher than this? What’s offsetting this?

[you&me]

Originally Posted by bluejays

Question about interest rates and inflation. Stats say that inflation in Canada is at 5% but is coming down fairly rapidly. We know that inflation numbers include a variety of things more than just food, but supply chain issues and whatever is causing food prices to be very high, are still very present. Even if inflation drops to 3% this summer, how are food prices still so high in reality and how can we say inflation is only 3% when food and gas seems much higher than this? What’s offsetting this?

What do you mean, "still"?

I'm not sure if this needs mentioning, but inflation is compounding, so just because the rate of inflation is dropping, doesn't mean things like food prices will drop... they're just going up less.

[MillerTime GFG]

Originally Posted by Sylvanfan

They held the rates today although I suspect they would have preferred to increase.

I was offered a 5 year fixed at 4.19 today which is tempting. Let's me move from my Variable that is 6.25 to that three months early. But the penalty is rate differential. I expect rates will come down eventually, but I can't see them getting back down to that 3.5 range in the next 5 years.

That's a very good 5-year fixed rate...

Is it a green bank by chance?

[Sylvanfan]

Originally Posted by MillerTime GFG

That's a very good 5-year fixed rate...

Is it a green bank by chance?

No it's a Provincial Treasury Branch.

[opendoor]

Originally Posted by bluejays

Question about interest rates and inflation. Stats say that inflation in Canada is at 5% but is coming down fairly rapidly. We know that inflation numbers include a variety of things more than just food, but supply chain issues and whatever is causing food prices to be very high, are still very present. Even if inflation drops to 3% this summer, how are food prices still so high in reality and how can we say inflation is only 3% when food and gas seems much higher than this? What’s offsetting this?

While it's one of the more visible expenses, food is ultimately only about 16% of the average person's expenditures, so it'd be the other 84% that's mitigating that. Gas for instance, was actually about 5% cheaper in February 2023 vs February 2022. So things like the following are seeing lower increases:

Clothing: 1.9%
Recreation/education: 2.1%
Household Operations: 4.1%
Transportation: 3.1%

Those things together are 45% of the CPI basket, and have a weighted average inflation rate of 3.1%. So that stacks against the other 55% which has higher inflation rates, and as a result the overall rate is at 5.2%.

[Slava]

Originally Posted by Fuzz

Why are you guys talking like the government sets interests rates for political reasons?

I mean the truth is the central banks don't even set rates, they basically adjust them so that they're inline with the markets.

[Fuzz]

Originally Posted by Slava

I mean the truth is the central banks don't even set rates, they basically adjust them so that they're inline with the markets.

What's the difference between "setting" and "adjusting"?

[Slava]

Originally Posted by Fuzz

What's the difference between "setting" and "adjusting"?

Well basically the bond market dictates what the rates will be, and the central bank kind of follows along.

[Fuzz]

Originally Posted by Slava

Well basically the bond market dictates what the rates will be, and the central bank kind of follows along.

So you are saying their decisions could just be replaced with a simple algorithm?

[Slava]

Originally Posted by Fuzz

So you are saying their decisions could just be replaced with a simple algorithm?

I'm just saying that while they set the short-term rate, they have no control over the longer term rates. While we "all" pay attention to this dog and pony show (particularly in the US), it mostly useless information. We don't need to hear from federal reserve people opining about their views or whatever. They could just sit back, stay out of the limelight and things will be fine if not better.

[bizaro86]

Originally Posted by Slava

Well basically the bond market dictates what the rates will be, and the central bank kind of follows along.

I mean, that's sort of true. But the Fed will borrow and lend essentially unlimited money to banks at its short term rate. So they can very much control short rates with unlimited supply/demand at their preferred price.

And long term rates are basically (as Leondros just noted) the market's forecast of future short term rates (with risk/illiquidity/etc taken into account).

[Slava]

Originally Posted by bizaro86

I mean, that's sort of true. But the Fed will borrow and lend essentially unlimited money to banks at its short term rate. So they can very much control short rates with unlimited supply/demand at their preferred price.

And long term rates are basically (as Leondros just noted) the market's forecast of future short term rates (with risk/illiquidity/etc taken into account).

Well it's definitely something of a chicken/egg discussion.

[opendoor]

Originally Posted by Slava

Well basically the bond market dictates what the rates will be, and the central bank kind of follows along.

I don't know, there are a several times in recent memory where the bond markets have gotten it wrong, only to turn on a dime in response to central bank policies. In fact, in the last 4 rate tightening cycles, they've been pretty far off on 3 of them:

-in the mid-'90s 5-year treasury yields were flying upwards and got to almost 8% in late 1994. 2 months later, the Fed hit its terminal rate of 6% and stayed in that range for half a decade. The bond market was predicting a return to '80s interest rates but the Federal Reserve charted a different path.

-in June 2007 bond markets were still on an upwards trajectory at about 5% even after the Federal Reserve had held its rate steady for almost a year. Within 2 months the Fed was cutting rates, and the bond markets were following the Fed the whole way down. By mid-2008, the Fed's rate was 2%, but bond yields were still hanging around 3.5%, and we all know what happened soon after.

-in late 2018, bond markets were predicting a continued relatively fast increase in the effective federal funds rate, and 5-year yields were even well above the Federal Reserve rate (3% vs 2.2%). But then the Fed paused, and bond yields dropped like a rock down to 1.5% pre-COVID.


If the Federal Reserve was reacting to bond markets in any of those scenarios, rates would have been held up higher for longer, but they weren't. And the same will happen now. Bond markets can predict imminent cuts all they want, but they're likely only going to happen just prior to (or during) a recession. It's going to be inflation and job numbers that drive central bank decisions.

[Slava]

Originally Posted by opendoor

I don't know, there are a several times in recent memory where the bond markets have gotten it wrong, only to turn on a dime in response to central bank policies. In fact, in the last 4 rate tightening cycles, they've been pretty far off on 3 of them:

-in the mid-'90s 5-year treasury yields were flying upwards and got to almost 8% in late 1994. 2 months later, the Fed hit its terminal rate of 6% and stayed in that range for half a decade. The bond market was predicting a return to '80s interest rates but the Federal Reserve charted a different path.

-in June 2007 bond markets were still on an upwards trajectory at about 5% even after the Federal Reserve had held its rate steady for almost a year. Within 2 months the Fed was cutting rates, and the bond markets were following the Fed the whole way down. By mid-2008, the Fed's rate was 2%, but bond yields were still hanging around 3.5%, and we all know what happened soon after.

-in late 2018, bond markets were predicting a continued relatively fast increase in the effective federal funds rate, and 5-year yields were even well above the Federal Reserve rate (3% vs 2.2%). But then the Fed paused, and bond yields dropped like a rock down to 1.5% pre-COVID.


If the Federal Reserve was reacting to bond markets in any of those scenarios, rates would have been held up higher for longer, but they weren't. And the same will happen now. Bond markets can predict imminent cuts all they want, but they're likely only going to happen just prior to (or during) a recession. It's going to be inflation and job numbers that drive central bank decisions.

Yeah but you're comparing the 5 year bond rate with the overnight, and suggesting that somehow the bond market was wrong. I don't think that's a fair comparison? For example the first point you make there. Sure, it's a 2% spread...but the spread there is generally 1-2%. And in the third point, it's the same issue. I don't think that indicates that the bond market is wrong though?