Bank of Canada – Holds Interest Rate

General Denise Dunkley 27 May

As was widely expected, the Bank of Canada left overnight rates unchanged at 0.75 percent and reiterated earlier comments about the likely trajectory of the Canadian economy. The Bank is more optimistic about the economy than private sector forecasters, believing that a rebounding U.S. and global economy will spur Canadian business investment and exports in coming months.

The problem is that business investment growth has declined sharply in the wake of the oil price rout and ensuing collapse in business investment in the oil patch–a situation that is not likely to improve anytime soon.

In addition, a marked further improvement in Canadian net exports likely awaits a further decline in the Canadian dollar, which has strengthened a bit recently with the uptick in oil prices. Although the Bank of Canada would never admit it publicly, they would welcome some slippage in the loonie to help boost trade. 

The Bank continues to aver that “the underlying trend of inflation is 1.6 to 1.8 per cent, consistent with persistent slack in the economy”. They will certainly continue with the current level of monetary accommodation until the economy moves closer to fully employment and inflation moves back to the midpoint of the 1-to-3 percent target band, which is not likely until next year. 

The Federal Reserve, on the other hand, will like raise rates in September. Nevertheless , the Bank will remain on the sidelines as the Fed rate move will no doubt be anticipated and put downward pressure on the Canadian dollar. 

Ironically, the Bank has no direct control over longer-term interest rates, which have risen significantly in the past month or so. Five-year government bond yields, which are closely linked to domestic mortgage rates, are determined by global market forces. These yields have risen in the U.S., Canada and elsewhere from a considerably overbought position, steepening the yield curve. Thus, the Bank will get no help from credit-sensitive spending to meet its forecast for stronger growth for the rest of this year.  

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Insurer’s Increase Premiums – June 1, 2015

General Denise Dunkley 22 May

CMHC to Increase Mortgage Insurance Premiums

OTTAWA, April 2, 2015 — As a result of its annual review of its insurance products and capital requirements, CMHC is increasing its homeowner mortgage loan insurance premiums for homebuyers with less than a 10% down payment. Effective June 1, 2015, the mortgage loan insurance premiums for homebuyers with less than a 10% down payment will increase by approximately 15%.

For the average Canadian homebuyer who has less than a 10% down payment, the higher premium will result in an increase of approximately $5 to their monthly mortgage payment. This is not expected to have a material impact on housing markets.

Premiums for homebuyers with a down payment of 10% or more and for CMHC’s portfolio insurance and multi-unit insurance products remain unchanged. The changes do not apply to mortgages currently insured by CMHC.

“CMHC completed a detailed review of its mortgage loan insurance premiums and examined the performance of the various sub-segments of its portfolio,” said Steven Mennill, Senior Vice-President, Insurance. “The premium increase for homebuyers with less than a 10% down payment reflects CMHC’s target capital requirements which were increased in mid-2014.”

CMHC is mandated to operate its mortgage loan insurance business on a commercial basis. The premiums and fees it collects and the investment income it earns cover related claims and other expenses while providing a reasonable rate of return on its capital holding target.

CMHC contributes to the stability of Canada’s housing finance system, including housing markets, by providing qualified Canadians in all parts of the country with access to a range of housing finance options in both good and bad economic times.

Effective June 1st, CMHC Purchase (owner occupied 1 – 4 unit) mortgage loan insurance premiums will be:

Loan-to-Value Ratio Standard Premium
Standard Premium
(Effective June 1st, 2015
Up to and including 65% 0.60% 0.60%
Up to and including 75% 0.75% 0.75%
Up to and including 80% 1.25% 1.25%
Up to and including 85% 1.80% 1.80%
Up to and including 90% 2.40% 2.40%
Up to and including 95% 3.15% 3.60%
90.01% to 95% — Non-Traditional Down Payment 3.35% 3.85%

CMHC reviews its premiums on an annual basis and will announce decisions on premiums following this review.

Canada Mortgage and Housing Corporation (CMHC) has been Canada’s authority on housing for more than 65 years.

CMHC helps Canadians meet their housing needs. As Canada’s authority on housing, we contribute to the stability of the housing market and financial system, provide support for Canadians in housing need, and offer objective housing research and advice to Canadian governments, consumers and the housing industry. Prudent risk management, strong corporate governance and transparency are cornerstones of our operations.

Why Are Bond Yields Rising? Will Mortgage Rates Follow?

General Denise Dunkley 15 May

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Why Are Bond Yields Rising? Will Mortgage Rates Follow?

Bond markets have tanked in the past several weeks, driving yields upward. Hundreds of billions of dollars have been wiped out in global bond markets. Ten-year government bond yields in Canada have risen 50 basis points (bps) in the past month as Treasury yields have jumped 32 bps. The rate increases in sovereign European bonds have been even greater, up roughly 60 bps for core Europe, albeit from extremely low levels. At today’s postings, 10-year Government of Canada bonds (GOCs) yields are at about 1.80% while 10-year Treasuries are at 2.24%. 

Why Are Bond Yields Rising? Will Mortgage Rates Follow?

In contrast, shorter-term yields are little changed. Yields on bonds worldwide coming due in one to three years — those most tied to interest-rate expectations — have remained little changed. Basically, fixed-income investors are signaling that they don’t expect central banks to begin hiking rates anytime soon. Indeed, JPMorgan Chase & Co. added to economic pessimism yesterday by revising down its estimate of U.S. Q2 growth to 2% from an earlier 2.5% on the heels of weaker-than-expected retail  sales data.

This comes a month before the Fed’s next meeting where policy makers will resume their debate over whether the economy is robust enough to warrant the first interest-rate hike since 2008. I don’t expect the Fed to raise rates in June and even a September rate hike is in question. So why are longer-term bond yields rising?

Bond markets were overbought earlier this year with widespread economic pessimism, especially in Europe, and ongoing deflation fears. In recent weeks, however, oil prices have rebounded with West Texas Intermediate (WTI) crude, the U.S. benchmark, climbing more than $17 a barrel from a six-year low of $43.46 on March 17. WTI is currently hovering around $60.00 a barrel. This rise in oil prices has dissipated fears of widespread deflation.

Euro pessimism has also diminished. After spending the end of last year slashing 2015 growth forecasts for the euro zone, economists are raising estimates again. As recently as February economists were calling for the euro zone to grow 1.1% this year. Now they’ve raised their median forecast to 1.4%, according to a Bloomberg survey.

Overbought positions have corrected. Data from the Commodity Futures Trading Commission show investors started 2015 with the biggest bet on U.S. government bonds in seven years. By the end of the first quarter, more than half that position was gone.

Will Higher Bond Yields Lead to Higher Mortgage Rates in Canada?

Probably not, at least for variable mortgage rates, even though interest rate spreads at financial institutions have been further squeezed. This has been one of the most competitive spring mortgage markets in years. Fixed mortgage rates could rise roughly 30 basis points if bond yields rise further. But today’s release of negative producer prices in the U.S. and disappointing retail sales suggest that further rate hikes will be muted. 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres