The fixed mortgage rate forecast for October 2013 is for rates to decline in the near term. Fixed mortgage rates, particularly the most popular 5 year fixed mortgage rates, are tied to 5 year benchmark bond yields. Insight into the direction of bond yields provides us with a crystal ball with which to predict near term fixed mortgage rates.
The price of bonds have been kept low by the US Federal Reserve‘s (Fed) quantative easing program. Under this program the Fed has been aggressively purchasing bonds from the open market keeping bond prices high and the inversely related yields low. The intent of the program is to keep borrowing costs low to help stimulate the economy. The impacts have crossed the boarder to Canada as our capital markets are closely related. The program has met its objectives and is keeping 5 year fixed mortgage rates near record lows. Of course this stimulus program must eventually come to an end and the speculation on the timing has investors jittery.
Fed Chairman, Ben Bernanke, hinted this past summer that the beginning of the end of the quantative easing program is approaching. Markets roiled at this suggestion launching government of Canada benchmark bond yields from their previous low of 1.15% on May 1st to a high of 2.16% just this past September 10th. This 1.01% increase in bond yields reflected a similar increase in 5 year fixed mortgage rates. This was not the result the Fed was hoping for, fearing that the spike in interest rates would further slow economic growth and undo their efforts. The Fed immediately came back with clarification that although the program will eventually end, it will remain in effect for the foreseeable future. Skeptical markets have been slow to adjust, but bond yields have been falling and dropped to 1.83% on October 18th. This 33 basis point fall has given mortgage lenders some leeway to once again reduce fixed mortgage rates.
Although there’s no expectation that bond yields will fall back to their 1.15% low, there’s still room to fall back to their 2013 average of 1.58%. For now, the banks seem content on keeping the extra yield to themselves, but the downward pressure will eventually give way to modest mortgage rate drops.