Mortgage rates have just increased substantially (0.65 %) on 2 years + terms (at least in Canada)!!! Why is that so when the Fed in the US and the Bank of Canada are reducing rates??? Is that just temporary or will the trend continue towards increases rather than decreases of mortgage rates? (November 24, 2001)
Mortgage rates are somewhat impacted by central bank moves, but you need realize that central banks deal in the shorter maturities, and any impact on the longer end is more of a 'trickle through' effect. Normally there will be an impact, and indeed ther was an impact occurring. Problem was, long term rates were not falling lockstep with the short term cuts. There was a major disconnect between the 10 year and 30 year notes still. What was keeping longer term rates higher? Back in July and August we reported our belief that the bond market was showing that economic recovery was in the future because long term rates refused to give in. Now that the 30 year has been eliminated from the Treasury's arsenal and long term yields have again started to climb nonetheless, it is clearer that the bond market is pricing in an economic recovery where money will be in more demand in the future and thus rates are higher.
Will it reverse? The bond market is similar to any market; it swings up and down, back and forth, but it usually trends one way or the other. It has been trending higher. The discontinuation of the 30 year bond tried to break the trend with a massive bond rally, but the trend reasserted itself as the econmic reports continued to come in better than expected. What started the trend was being confirmed by these later economic reports. The bond market has been slaughtered this past couple of weeks. Just as it was too far on the rally, it apears to be getting too far the other direction. We could see bonds rally a bit over the next week or so (more like recover from the past week's slaughter), but we don't think the trend will change. It is subject to upset if economic numbers tank of there is another terrorist attack, but if the long term view is that we will recover economically (and judging from the bond market's actions, it is anticipated to be a sharp recovery), the trend will hold.
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