Monday, September 14, 2009

What can go down, most certainly can go up.

Last week we commented on how it was inevitable that interest rates were going to rise whether the Bank of Canada or the Federal Government wants it to or not (see Denials and Delusions).

The reason? Higher yields in the bond market (which is 14 times larger than the TSE S&P) translate within days – sometimes hours – into higher mortgage rates for consumers. And this happens whether or not the Bank of Canada has moved its overnight loan rate.

Need proof?

You may recall several news articles trumpeting that mortgage rates fell last week.

At TD Canada Trust, a five-year closed mortgage drops three-tenths of a percentage point to 5.55%. At the Royal, the five-year closed term falls three-tenths of a point to 5.49%. At BMO, a five-year loan also falls to 5.49%, but that represents a drop of .36 of a percentage point. These are all posted rates. The big banks typically offer discounts of at least a full percentage point on most closed mortgages.

But what prompted the drop?

Did the Bank of Canada lower it's historic rock bottom rate of 0.25%? Did the Federal Government put pressure on institutions to trim down rates?


As CBC noted in their article, Canadian banks chopped their mortgage rates across the board by up to a third of a percentage point because the cost of borrowing in the bond market fell.

The Bank of Canada and the Federal Government had nothing to do with it.

Remember that because what can go down without intervention, can just as effortlessly go up without intervention. And if the cost of borrowing in the bond market rises, interest rates will shoot up instantly.

And the Bank of Canada or Federal Government won't have a say in the matter.


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