Interest rates MAY go up soon

I’ve been doing some analysis of bond yields recently and if you watch the trends carefully, you might agree that fixed-rate interest rates may be on the rise.

If you’re under the impression that fixed rates won’t go up until June of 2010, you may miss the boat. That’s because only variable / adjustable rate mortgages are linked to the Bank of Canada’s overnight rate, and subsequently the banks’ “prime rate”.

Fixed rates are directly correlated with Candian bond yields. A five-year fixed rate, for example, is linked to the yields on Canadian five-year bonds. When they go up, rates go up. When they go down, fixed rate mortgages go down.

Here’s why I think we may be in for higher fixed rates. As you can see below, the yield on a 5-Year Canadian bond is 21 basis points higher than it was a month ago.

Canadian Yields Latest Previous 1 week 4 Weeks ago
5-year 2.11 2.09 2.09 1.90


That’s bad news for lender margins, as it costs them more to borrow money with which to lend to the consumer. When that happens, they eventually have to raise rates to remain profitable.

The only thing that has been keeping rates steady lately, in my opinion, is the level of competition out there. Nobody wants to be the first to raise rates, especially in the busy spring season. Once the first lender does, though, it’ll be a stampede to get back in line.

So, if you’re thinking about refinancing or purchasing a home and need a mortgage, don’t waste too much time before you get pre-approved or you might miss out on a great rate.