6 april 2010
For example, if we compare the posted 5-year fixed rate to the prime rate, the difference between them will be 360 bps.
It’s considered to be the biggest spread in the last 30 years (based on the Bank of Canada’s information).
Basically, today’s posted fixed-prime spread is connected with the 360 bps reading we could see the last summer. The only difference is that variable rate discounts were not even close to the prime – 50%.
In other words, today’s situation shows us what many already know: fixed rates are selling for a major premium over riskier variable rates.
If you look back to 1980, you’ll see that a fixed-prime spread was about 2%+ and the prime rate has never averaged more than 1.75% higher in the next five years.
We can’t be sure that 2010-2015 will be the first such instance, but one thing is for certain – today’s fixed rates are trading with a huge built-in “insurance premium,” and the 2.40% point edge gives variables a big advantage, the closer we move to the next rate hike.