Fixed Mortgage Rate Forecast – July 2012

Flat Rate Forecast

Fixed mortgage rates are based on government benchmark bonds yields.  These bond yields are essentially the cost of funds for mortgage lenders who then factor in their operating costs and profit margins before establishing their 5 year fixed mortgage rates.  These days the premium over the bond yield hovers between 1.85% and 2.10%.

5 year benchmark bond yields continue to bounce around record lows in the 1.25% range.  Over the past 30 days the average yield was 1.24% with a low of 1.15% and a high of 1.30%.  Yesterday’s close of 1.26% was right in the middle of this 30 day average and the near term expectation is the status quo.

Bond yields have an inverse relationship with demand and price, and the current high demand for the safety of Canadian bonds is expected to continue for the next 2 to 3 years.  Much of the bond buying comes as a result of mass sell-offs of European bonds which have had the opposite effect on their mortgage rate environment.  Developments over the past month have done little to improve the health of the European economy.  It’s apparent that the European crisis and global floundering will not solve itself anytime soon and that Canada will continue to be a solid market where global investors can park their money.

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