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Variable Rate might be a decent bet!

Credit market U-Turn: Bond yields now signal mortgage shoppers should go with a variable rate

Recently, Canada’s five-year bond yield dove to a multi-month low, a bearish short-term signal for fixed mortgage rates.

Why the U-Turn in rates?

The whiplash in rates comes as  President Trump threatens to tax Canada’s imports into the U.S.  If he drops a 25% auto tariffs on Canada as threatened, one in five Ontario manufacturing jobs could be lost, says TD Economics. The odds of Canada getting a worse NAFTA deal (or no NAFTA deal) would also soar.

Add these threats to a diving Canadian dollar and the risk of Canada’s EU trade deal falling apart…all of a sudden our central bank isn’t so confident about raising interest rates.  We’re seeing market-implied odds of a July hike steadily dropping.

The difference between 5 yr fixed and variable is still close to 1 per cent. Bank of Canada would need more than four 25 points hikes to pay less interest in a 5 yr fixed.

By the time rates jumped that high, Canada would be close to its expected neutral rate, where the Bank doesn’t have to keep hiking. The risk of runaway rate hikes after four more increases is arguably small.  The Globe and Mail



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