Why has the U.S. 15 yr. and 30 yr. fix mortgage rates gone up half a percent?
You can blame President-elect Trump who promised to reduce the corporate income tax from 35% to 15%, reduce the tax on repatriated profits from abroad from 35% to 10% and reductions in personal income tax rates. This clearly points to substantial federal deficits. The economic laws of supply and demand apply to bonds. Increasing the supply of bonds being sold results in bond prices going down and yields going up. The bond market has already reacted by selling off on expectations of higher deficits and more bonds coming to market.
Now the average Canadian homeowner whose mortgage comes up for renewal in 2017 may not understand why fix mortgage rates are on the rise. After all, the Bank of Canada decision last Wednesday was to hold the overnight lending rate at one half per cent. This rate has remained unchanged since July 2015. Market watchers believe that the Bank of Canada will not follow the Fed in raising rates in 2017 due to slower than expected economic growth in Canada.
The problem is higher bond yields in the U.S. has also cause a selloff in Canadian and European bonds. Some money has moved from Canadian bonds to the United States. Since fix rate mortgages are closely tied to bond yields, mortgage rates in Canada could also be on the rise. Some banks like the Royal Bank has already raised some mortgage rates.
The Royal Bank changes affect new customers with fixed rate loans for terms of three, four and five years. The fixed rate for three years rises from 2.69 per cent to 2.79 per cent, four years goes from 2.79 per cent to 2.89 per cent and five years rises from 2.94 per cent to 3.04 per cent Nov 15, 2016
Is this only temporary or is it the start of higher mortgage rates to come?
My big concern is that the bond selloff could continue. It really boils down to Trump’s agenda during his first hundred days in office. Will the fiscal stimulus for infrastructure, between $500 Billion and $1 Trillion, be passed early in the Trump administration? Where will that money come from, selling more bonds?
It appears the Fed is behind the curve regarding interest rates. Bond investors have already pushed interest rates half a point higher but the Fed is expected to raise rates by only a quarter point next week. Will they try to catch up or even change their views about keeping short-term rates lower for longer?
Be aware, higher U.S. bond yields could have a far reaching effect beyond just U.S. mortgage rates.