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Tuesday, August 30th, 2016

Today’s Fixed Rates Are Gifts

Be careful of looking the gift horse in the mouth.

Last week saw multiple broker-channel lenders get more competitive on pricing. That pushed fixed rates down to fresh record lows, inspiring some brokers to advertise 5-year rates at 2.94-2.99% or less.

Much of that discounting was thanks to lower bond yields (which generally lead fixed rates). You can see the recent downtrend in yields in the chart below.

5yr-yield

In all of the emotion of plunging rates, however, it’s easy to forget that they can reverse to higher just as fast as they drop.

On Friday, the 5-year government yield popped 12 basis points—the biggest one-day increase in almost a year. When that sort of thing happens near lows, after a long downtrend and a period of sideways trading, it often marks a noteworthy change in market sentiment.

As bond traders suddenly reverse their positions, it can halt the drop in yields (and fixed mortgage rates) for a few weeks, and sometimes much longer.

For that reason, those waiting for lower rates before applying for a mortgage may be taking a bit more risk than normal. It’s kind of like passing a gas station on empty to save a few more cents a litre. You may find another station, but if you’re wrong, it won’t be much fun pushing.

If yields bounce much higher (e.g., into the 1.40-1.50% range), deep-discount lenders will waste no time taking rates back up a few notches.

So if you need a 5-year fixed rate, it’s as good a time as any to take the “gift” lenders are giving. This is certainly not to say that rates won’t go lower. (Global and domestic risks could keep yields depressed for a while.) But don’t be afraid that applying now will make you miss the boat on a better deal. When it comes to rates, it’s almost impossible to pick the bottom.


Rob McLister, CMT

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