Is The Bottom Of Fixed Mortgage Interest Rates Behind Us?

Government of Canada bond yields have been rising which is a leading indicator that fixed rate Mortgages are set to respond in kind (and they are).

Is the fixed interest rate bottom behind us?

U.S. inflation data is proving to be rather bullish, raising concern of a rate increase by the U.S. Federal Reserve, sooner than anticipated. This is pushing up U.S treasury yields that are spilling over into our country raising Government of Canada bond yields.

Here are a couple large and broad reasons stoking the U.S. inflation fire:

1. U.S. stimulus (link).
   
   The relief package includes $1,400 direct aid checks to qualifying Americans, $350 billion in state and local aid, $130 billion for elementary schools, $3,600 for child tax credits, food aid, and rental assistance, funding for COVID-19 testing and vaccines, $400 per week in additional federal unemployment benefits through September 2021, and a raise of the federal minimum wage to $15 an hour
   
   
2. Decreasing infection rates and vaccine roll out (link).
   
   As of February 18, 2021, 57.7 million vaccine doses have been administered. Overall, about 41.0 million people have received at least one dose of vaccine, which is 12.4% of the U.S. population, and about 16.2 million people have received two doses of vaccine, which is 4.9% of the U.S. population. As of February 18, the 7-day average number of administered vaccine doses reported to CDC per day was 1.6 million, which was a 1.4% acceleration from the previous week.
   
   
3. Tone of the U.S. Federal Reserve (link).
   
   This is a excerpt from the meeting of the U.S. Federal Reserve in late January. “The economy is a long way from our monetary policy and inflation goals, and it’s likely to take some time for substantial further progress to be achieved,” Fed Chairman Jerome Powell said at his post-meeting news conference. Policy will remain “highly accommodative as the recovery progresses,” he added.
   
   Mind you, this statement was from end of January 2021 (date of publication end of February 2021). This does show the Federal Reserve is willing to be patient, even as other inflationary data surfaces (and it is).
   

What’s Happening In Canada?

When the U.S. elephant moves, we (Canada) respond. But what are Canadian policy makers executing and planning?

1. The Bank of Canada is still purchasing $4B of Government bonds per week, determined to pin bond yields to the floor as part of a multi-prong stimulus package.
   
   I think if bond yields continue to rise in Canada, driving Mortgage rates higher which begin to threaten our budding economic recovery, or more importantly Canada’s housing market, I think more force could be applied to the asset purchasing program to stave off higher rates.
   
   If this were to happen, fixed Mortgage rates could trend back down.
   
2. The Bank of Canada has repeatedly stated they are holding off raising the key lending rate until the economic recovery is “well underway”.
   
   As a quick refresher …the key lending rate influences commercial banks (RBC, TD, etc) prime lending rate that in turn influence Canadian variable rate Mortgages.
   
   Well underway essentially means sometime AFTER the U.S. Federal Reserve raises their key lending rate. A economic narrative I understand is the Bank of Canada will not raise interest rates too far in front of OR too high relative to the U.S. Federal Reserve. Why? The Loonie would appreciate to a level the would render our export economy at a disadvantage. The Bank of Canada considers the broad economy (including the housing market) when adjusting the key lending rate.
   
   Well underway also means at a time slack in the economy has been absorbed, intersecting with the Bank of Canada’s 2% inflation target. Based on data available to the Bank one month ago, at the release of their semi-annual Monetary Policy Report, intersection of absorbed economic slack and the 2% inflation target was planned for sometime in 2023. Let’s acknowledge, timelines can and do change.
   
   On the topic of “slack in the economy” (link) …before the pandemic, Canada’s economy was at record low unemployment rates, increasing employment participation rates, wage growth was rising and improving quality of jobs – Canada STILL had slack in the economy and we were barely sustaining 2% inflation.
   
   I think it is possible we see inflation in Canada, whether acknowledged by Statistics Canada or not, that will put the Bank of Canada between a rock and a hard place. Why? I think Canada’s central bankers might consider raising the key lending rate before their desired intersection of economic slack and the 2% target. I’m watching!
   
   
3. Continued fiscal stimulus money is not stopping, for now (link).
   
   Canada’s covid economic response plan continues with support for: individuals, businesses, support sectors, organizations helping individuals etc.

We have U.S and Canadian monetary and fiscal policy at very accommodative levels, as leading indicators of inflationary pressure reveal themselves. I have also written to you before (link) about each countries parabolic money supply growth. The writing on the wall is inflation is here – and one inflation hedge asset is Real Estate.

Macro Policy. Micro Example.

The above are abstract macro economic policy.

Here is an example of how the stimulative efforts of Canadian policy trickle into Canadian households …this is a micro example…

A family consolidates debt into their Mortgage, or simply lowers their Mortgage rate, with the result being a monthly savings of $250/month. This is great! Cash flow increase from debt savings, is after tax dollars. This is the equivalent of earning about $333/month which is about $4,000 (before tax) more income per year! Think about how that is inflationary, alone. I’ve helped people save WAY more than $250/month.

Conclusion:

Inflationary data is piling up. In “normal” functioning markets interest rates rise. Our policy makers, in both Canada and the U.S., are willing to intervene as they see fit.

If you read this post, and find it helpful, please share. Reach out to me to help plan your sale, purchase or any other Mortgage need.

403-809-5447
chad@canadamortgagedirect.com

Talk soon,
Chad Moore