Latest in mortgage news: bond yields plunge as U.S. inflation eases

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Canadian bond yields took another step down today following the release of lower-than-expected inflation data south of the border.

The U.S. Department of Labor reported that lower gas prices helped cool inflation to a rate of +3.2% in October, down from 3.7% in September. Core inflation, which excludes volatile food and energy prices, eased slightly to 4% from 4.1% previously.

The data was enough to cause markets on both sides of the border to solidify expectations that rate hikes are now done and that past rate hikes will be enough to bring inflation in both countries back down to 2%.

“Markets are pricing no further hikes and a decent shot at a Fed rate cut by March 20th,” noted Scotiabank’s Derek Holt. He added that 100 basis points, or one percentage point, of rate cuts by the Federal Reserve are also now priced by the end of the year.

“My bias is that it will take a lot more than this report to motivate cuts that early…but we’ll see with more time and more data,” Holt writes.

Regardless, Canadian bond markets responded by staging a price rally, which resulted in yields falling to four-month lows (bond prices and yields move inversely to one another). The Government of Canada 5-year yield is now down nearly 60 bps from its recent high reached in early October.

Given that fixed mortgage rates typically follow bond yields, further rate cuts could be expected in the coming weeks.

But as we’ve reported previously, mortgage providers haven’t been lowering rates in lockstep with bond yield decreases, largely due to risk premiums that are still being priced in.

Ryan Sims, a TMG The Mortgage Group broker and former investment banker, says that’s not likely to change.

“While 5-year bond yields have been down, it seems that the mortgage rates are staying elusively high,” he wrote in a note to subscribers.

“As predicted back a few months ago, lenders are padding their bottom line, and increasing spread to account for economic risk,” he added. “Yield drops are not copying over bp for bp. This will continue. You can jump for joy at a 100-bps 5-year bond [yield] drop, but it probably only translates into 50 bps on the mortgage rate.”

Canadian inflation data for October will be released on November 21.

BoC survey shows lending conditions easing for households

Canadian households reported an improvement in mortgage lending conditions for the first time this year, according to the Bank of Canada’s third-quarter Senior Loan Officer Survey.

The improvement was a result of the Bank of Canada moving to the sidelines after raising rates in July, said BMO economist Shelly Kaushik. She added that the easing was driven by pricing measures “as non-price conditions were still tightening on net.”

“However, tighter lending conditions for businesses signal ongoing weakness in activity from the cumulative impact of previous policy tightening,” she added. More lenders reported tighter conditions in the quarter, marking the highest share since mid-2020.

GTA condo sales reach 20-year low in Q3

New condominium sales in the Greater Toronto Area (GTA) totalled 2,664 units in the third quarter, a near 20-year low, according to Urbanation Inc., which released the data in its Condominium Market Survey.

While the Q3 sales are up 41% from last year, Urbanation notes that presale activity “effectively ground to a halt” a year ago.

“Elevated interest rates and heightened market uncertainty continued to grip the new condominium sector in the GTA,” the report reads. “While some new launches with competitive price points have seen success, many projects have been unable to make an economic case for proceeding in the current market, causing more supply to be put on hold.”

Average condo prices launched for presale in Q3 have fallen to $1,216 per square foot, an 18% decline compared to the record-high of $1,485 per sq. ft. recorded a year earlier.

“Average sale prices decreased as buyers and developers focused more of their activity on lower priced locations mainly in the 905 Region, which represented more than half (54%) of total Q3-2023 sales,” the report noted.

CMHC launches search for new CEO

Canada’s housing agency, the Canada Mortgage and Housing Corporation (CMHC), has announced that the search is now underway to find a new president and CEO.

In a release, the Government of Canada said it is encouraging applications from “qualified, diverse, and talented individuals” by its December 11 deadline.

“This process encourages applications from individuals with a strong knowledge of housing and financial markets, both domestically and internationally, and their role in macroeconomic policy,” the release says. “Strong knowledge of CMHC’s housing policy and legislative mandate, and of the Government’s social, economic, and fiscal policies and priorities related to housing would be an asset.”

The post of president and CEO has been left vacant with the planned departure of current chief executive Romy Bowers, who is scheduled to leave her post in December after less than three years in the position.

Bowers, who previously served as CMHC’s chief risk officer, will be taking on a new position at the International Monetary Fund as director of the Office of Risk Management.

Canadians’ view on personal finances reaches new low

Consumer confidence continued to fall this week, while Canadians’ view on their personal finances reached a low last seen during the pandemic.

The Bloomberg Nanos Canadian Confidence Index (BNCCI) fell to 48.68, down slightly from last week and from a high of 53.12 in June. A score below 50 indicates a net negative economic outlook by Canadians. The average for the index since 2008 is 55.54.

Meanwhile, Canadians’ sentiment on their personal finances fell to 12.74 from 13.04 last week and 14.84 four weeks ago.

“Positive views on personal finances have not hit a level this low, numerically, since the period near the beginning of the pandemic before government supports fully kicked in,” chief data scientist Nik Nanos said in a statement. “Forward-looking expectations are on the decline.”

Consumers’ outlook on real estate rose slightly this week to 37.47 from 37.18 last week. However, it remains down from 42.98 four weeks ago. Sentiment on job security is also down from last week.

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