28 October 2010

It’s obvious that long-term impact is almost impossible to predict, because certain random events often intervene. Today, the bond market is worried about the U.S. debt burden and the fact that a U.S. Fed is printing hundreds of billions of inflationary dollars to stimulate the American economy. (Gross actually called this monetary policy a “Ponzi Scheme”.) But still it doesn’t mean something else can’t counterbalance this inflationary phenomenon.
Explanation:  Canadian mortgages are directly influenced by these factors, because US yields are correlated to Canadian yields. When the U.S. sells off bonds, Canadian yields usually rise. And it means higher fixed mortgage rates.
In case of the short-term, market technicians say the bonds are “overbought”, that’s why the situation can change soon.  
No one knows whether the climb in yields is going to continue. Today the 5-year yield hit a 1-month high – it’s up 22 bps (0.22%) from the last Wednesday’s low. It’s quite possible that if it rises another 10 bps (0.10%), than deep-discounted fixed rates may reverse higher.
These changes concern people who want to lock in a rate in the next 30-60 days. The odds are fairly good that yields won’t fall much lower soon. That’s why, if you need a fixed rate approval in the next 1-2 months, it’s really not a bad idea to get a rate guarantee as soon as possible.

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