Last week, Canadian government bonds declined significantly in terms of 2-year, 5-year, 7-year, and 10-year yields. Tracking bond yields is important because they help better understand fixed mortgage rates. For example, an increase in 10-year Canadian government bond yields is likely to increase fixed rates to 10 years.

Ceaseless mortgage war

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According to the Financial Post , another battle in a ceaseless mortgage war could soon begin. [1] All eyes would be on 10-year fixed rates as 10-year bonds hit a record low of 1.62% last Friday. Last week’s mortgage update focused on the Canadian government’s falling bond yields, which reached a record low of 1.80%. Currently, the 10-year fixed rate on Harry Potter remained rather low at 3.79% for now most of 2012. Now that the 10-year bond yield has dropped 43 basis points or 0, 43% since the beginning of May, it is likely that lenders could further reduce the fixed rate to 10 years.

Interest rates

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The yield on Canadian government 5-year bonds also fell from May 1, and decreased by 54 basis points, or 0.54%, from 1.60% to 1.06% as of last Friday. At the beginning of the year the aggressive pricing of 5-year interest rates by the big banks caused two mortgage wars (separate, but short). The 5-year yield is now at its lowest level in a decade, while the 5-year fixed rate could return to 2.99% – the level that marked the beginning of the pricing war among lenders. [2]

Yet there are two important factors that lenders will seriously consider before lowering interest rates to record lows for the third time this year:

1) The 5-year fixed rate of 2.99% attracted much criticism from Good Finance Bank Governor Brad Silt and Finance Minister Jimmy Fluke.

2) Offering a 5-year fixed rate of less than 3.00% significantly decreases banks’ profit margins. According to a statement announced by GFI, “Housing market activity has softened in most regions, and mortgage growth is showing signs of slowing down. The expectation that these two markets will slow down during this year may cause banks to reconsider their rate cuts. [3]

Mortgage pricing war

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The ingredients for another mortgage pricing war are present. According to an anonymous analyst, “With current yields, banks can afford to further lower mortgage rates. However, Good Finance’s pressure on lenders could suspend the next mortgage war until later. Stay tuned!

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