Ben Bernanke and the US Federal Reserve (Fed) shocked markets this week with the announcement that it will continue with it’s bond buy-back program. This program, known as quantative easing or QE, is designed to keep bonds liquid and to force down yields or borrowing rates for bond issuers. The net effect of lower bond yields is lower long term mortgage rates in Canada.
Earlier this summer Mr. Bernanke hinted that the economy was beginning to show some life and that the Fed may begin the process of tapering away from quantative easing. That speech roiled markets causing massive sell-offs in the bond markets. The flood of sales dropped bond prices and caused net yields to jump by nearly a full percentage point. The effects were felt here in Canada with 5 year fixed mortgage rates jumping from 2.89% to 3.69% in a few short months.
This latest announcement was an attempt by Mr. Bernanke to reverse the effects of his previous comments. “Conditions in the jobs market are still far from what we’d like to see,” Mr. Bernanke advised reporters. Lower bond yields help keep down corporate borrowing costs allowing companies to spend more on labour. The net effect of lower mortgage rates is to support the housing market which is a key driver for many industries.
Canadian Mortgage Rates
Although we have yet to see any changes to Canadian mortgage rates, the Canadian bond market is feeling the impact. 5 year government of Canada benchmark bond yields dropped 9 basis point in the 2 days following the announcement. Bond yields are the effective cost of funds to mortgage lenders to downward movement on bond yields puts downward pressure on mortgage rates. The most noticeable impact of the announcement is the stabilization of mortgage rates. Bond yields have been steadily rising for the past 2 months and this small drop marks an end to the upward pressure. Although the long term forecast for mortgage rates remains upward biased we are stable, at least for now.