Nothing spooks financial markets like uncertainty and risk, and it shows in today’s bond yields.
In less than a month, yields have tumbled 62 bps. That’s the biggest one-month drop since December 2008.
A glut of negativity is herding investors into the safety of bonds (and driving down yields), including:
- The European crisis
- North Korean war threats
- The stock market selloff (The S&P 500 has plunged 10% since April 23—dropping below the key 200-day moving average)
- A dip in the U.S. leading indicators (the first decline in a year)
To get a sense for the perceived financial system risk out there, take a look at LIBOR. LIBOR is the rate at which banks lend unsecured funds to each other. It’s risen 29 of the last 30 days.
The good news definitely seems sparse beyond Canada’s borders, but fear is often fleeting. While the current market environment is grim, sentiment may be considerably different next week.
Today’s concerns must also be set against a strong rebound in Canadian economic performance. When the problems above are resolved, the BoC will likely resume focus on Canada’s robust domestic indicators.
- Most analysts still expect a rate hike come June or July. See: June Rate Hike Still Likely…
- However, traders have removed some of their bets for a Bank of Canada move on June 1. Financial futures peg the probability of a June hike at roughly 50/50.
- Fixed rates may drop a bit more. This morning, RBC cut its 5-year rate by 11 bps. TD has followed. Other banks should be right behind.
- The banks’ new 5-year fixed “special offer” rate is 4.59%. Expect a minimum of 10-20 basis points off that if you’re well qualified.
- Barring further changes, the new mortgage qualifying rate will be 5.99%, effective May 31.
Sidebar: The last time 5-year yields were this low was March 5. Posted 5-year fixed rates were 5.39% at the time. Today, they’re 5.99%—60 bps more! Granted, there’s more of a risk and rate-hike premium built into today’s rates, but 60 basis points seems extreme.
Source: Canadian Mortgage Trends