Last Friday, the credit ratings agency Standard & Poor, downgraded nine European nations.  This basically means that these countries, or borrowers, are “officially” no longer considered to be as reliable as they were previously.  Although there was a lot of hullaballoo in the media about the downgrades, the markets were really only affected for a day or two.  This is because the various ratings agencies had been warning of potential downgrades across Europe for the past few  months.   Therefore, the markets had already priced this action into their projections and although further downgrades may occur in the future, the current actions should not have surprised anyone.

Yesterday Spain held a successful bond auction that saw bond yields drop to just under 5.5%, a dramatic improvement from over a month ago when yields were over 7%.  However, Greece remains problematic and is still teetering on the brink of default.  Overall, Europe continues to stumble along with bits of good news popping up here and there.

On Tuesday, the Bank of Canada left the Prime rate untouched and expressed concern about the European debt crisis slowing economic growth in Canada for the next year or longer.  Despite recent positive growth numbers, some pundits are predicting cuts of 0.5% to the Prime rate over the next six months.  I think that the Bank of Canada will remain on the sidelines through 2012, saving their few remaining bullets in case the villain that is negative growth rears its ugly head. 

After one lender announced a 5 year fixed term at 2.99% last week, many other lenders have decreased fixed rates and there are a number of appealing options available.  Two lenders have 10 year fixed terms at 3.89% and 3.99% respectively.  If I was to purchase property now, with the expectation of holding the property for at least 5 years, I would jump all over these 10 year terms.  This is a once in a lifetime opportunity for purchasers to lock in tremendously low rates for a decade.   These lenders are not lending on all Whistler properties but there are attractive options for all buyers at this time.

Jason McLean  BSc, AMP
jason@garibaldimortgage.com 

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As the European boondoggle carries on, I think this is a good time to look at what 2012 holds in store for our currency and interest rates.

Fixed term interest rates should remain relatively stable over the next year.  We may see about 0.25% movement either way depending on a number of factors but 5 year terms should still be available at less

than 4% by the end of the year.  Even if the fixed rates do increase slightly, they will still be near historic lows and should entice buyers to jump into the market.  Existing mortgages coming up for

renewal in 2012 will definitely see a huge reduction in interest rates compared to the rates that were obtained 4 to 5 years ago.

The Prime rate is unlikely to change in 2012 but the differential from Prime for variable rate mortgages will likely continue to become more expensive.  The days of Prime less 0.90% are a distant memory as

current variable rate mortgages are ranging from Prime less 0.30% to Prime plus 0.30%. The premium over time will likely creep up for most of the next year. This will reduce the already low spread between variable rates and fixed rates  and drive more consumers to take the fixed option.

The Canadian dollar will see continued volatility in value against the US dollar in 2012.  As the European saga continues, daily movements of half a cent to two cents will probably be the norm.  Unless a dramatic

improvement is seen in Europe, the Canadian dollar will likely range between $0.915 and par for most of the year.  However, the regular large movements in the value will provide opportunities for spot trades for those looking to take advantage of the volatility.

With the crystal ball being as cloudy as it is, there is always a chance that any number of events will throw a wrench into even the best projections.  Major events that may change the global economic landscape include:

- If Europe is able to get its act together for the next major summit in March, there would be an increase in the Canadian dollar and a greater possibility for fixed rates to rise.

- If the EU implodes or the Euro is abandoned, then the Canadian dollar will likely fall further in value while fixed rates have a chance of decreasing.

- The US election is always a wild card as promises are made by all parties.

- If the "Arab Spring" movement continues to spread to more countries in 2012, oil prices may be the biggest change which will help Canada but also increase inflationary risks globally.

Jason McLean   BSc, AMP
jason@garibaldimortgage.com

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The bond markets of Europe continue to dominate the headlines this week.  Some ten year bond yields decreased significantly earlier this week as the markets were encouraged by this coming weekend’s summit to discuss new measures to solve the current crisis.   Although the markets moved backwards today as expectations on concrete results have been tempered by European Central Bank head Mario Draghi’ s comments about not being an emergency buyer of bonds.   Bonds are essentially formal loans, usually issued by various governments and companies, to fund various activities, projects and service existing debt.  If there are no buyers for a party’s bonds, the,  the price keeps decreasing until someone is willing to buy it.  This means increasing yields to the purchaser of the bonds and increasing interest rates for the bond seller (borrower).   

After at least two years dithering about the debt problems, the main economic players in Europe are finally going to push for greater accountability.  Unfortunately, everyone will have to give up something, even the economic powerhouse of Germany, for the greater  good of the EU and its economic prospects.  It appears that even substantial agreements are made that will push Europe in the right direction, it will take at least a few years to return to decent growth levels.   If and when that happens, the markets will return their attention to the deficit issues of the US but for now the markets are happy to park their funds in US T-bills.  Apparently it is better to deal with the devil you think you know.

The Bank of Canada kept the Prime rate unchanged this week and due to concerns about Europe and the US, it looks like the Prime rate may not change again until 2013.   With volatility being the new normal for the equity and currency markets, Canadian bond yields may move more than usual over the next year but fixed rates should still end next year at levels close to the current situation.

This week, one lender announced a 7 year fixed term rate of 3.89% and a 10 year fixed rate of 4.39%.   If you believe in a 7 year economic cycle, it looks like there are about three to four years left in the current cycle.   This makes either of these terms fairly attractive as a defensive measure against the eventuality that rates must increase. 

Jason McLean  BSc, AMP
jason@gariabldimortgage.com

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The world as we know it has changed. Many of the rules that we used to base our predictions and forecasts on, now hold as much water as a sinking ship. Fundamentally, previous assumptions were based on the availability of huge oil reserves and also that oil was relatively inexpensive to drill, refine, ship. Earlier days saw high level manipulation from various Governments for the simple sake of profit taking. People accepted the price fluctuations as cyclical changes. So how does our current global oil situation affect mortgage rates?

Interest rate performances have been driven by some basic guidelines…the economy expands…inflation is a concern…so upward pressure on rates…the economy contracts, inflation retreats, and there is downward pressure on rates… But alas now, the influencing factors are so much greater…the world is so much bigger than mere elections and droughts…those were the good ‘ole days.

Jeff Rubin, author of “Why Your World Is About To Get A Whole Lot Smaller,” is an energy specialist, and previously a high level economist with CIBC. His recent blog post on China’s demand for oil and how it could affect the US is an eye opening piece. The following are excerpts:

• Currently, almost 2/3 of the People’s Bank of China $2.85 trillion foreign reserves, are in US dollar assets. In a world of cheap oil, China’s central bank felt compelled to become the largest holder of US Treasury bonds to keep the Yuan from rising and to undermine the competitiveness of Chinese exports in the US marketplace.
• The world is different now.  Not only will triple digit oil prices sever those trans-oceanic trade links through soaring transportation costs but they will throw the U.S. economy back into recession. Contracting economies, particularly those also burdened with huge fiscal deficits, don’t make great trading partners.
• Without access to the huge pool of Chinese savings, the U.S. is no more capable of financing its fiscal deficit than the PIGS (Portugal, Ireland, Greece or Spain) are capable of financing theirs. If China stops funding the Treasury market, Treasury yields will soar, pulling mortgage rates with them.

So, what does this mean for Canada? Will our rates be pulled northward by the influence of the situation in the US? Canada is standing on a little more solid ground than the US, but how much more solid? Our GDP in the last 12 months has shown marginal increases, largely due to our own Mining, and Oil & Natural Gas extraction and processing. Will our natural resources be enough to sustain us through the ever more volatile economic climate?

It seems impossible to answer these questions because the world as we knew it now seems to change on a daily basis. And apart from the numbers that seem to continually dominate discussion, what about non-numerical impacts? Anyone into discussing the global human and environmental outcomes of our new world?

View Jeff Rubin’s blog post here.

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Here is the latest article from Moshe Milevsky…a great perspective on the broader picture of interest rate movement.

He is the professor that wrote the article in 2001 about the benefits of taking variable rate financing. His analysis spanned 50 years from 1950 to 2007, and the conclusion was that in the long run, variable rate financing would save you money.

His most recent article suggests that even if a fixed interest rate has an “insurance” cost attached to it, it may still be worth your while to lock-in your mortgage as protection against rising rates.

What has not changed, and will always remain a constant, is that not everyone has the same risk tolerance. For some, having a sound sleep at night knowing that their mortgage rate won’t change, is worth the price of the insurance. And at today’s historical low rates, the price of that sound sleep is quite attractive and affordable.

View Moshe Milevsky’s new article here.

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