Kiyoko Fujimura

March 16, 2011
Every now and again, there’s a news story that makes me sit back and think: “Damn, when did we all get so connected?” This is one of those stories.
The tragic earthquakes in Japan and the instability in the Middle East have caused the Royal Bank of Canada to cut mortgage rates. They cut the 10-year fixed rate by 0.15 basis points and the 5-year fixed rate by 0.10.
Other banks are likely to follow suit.
According to the Globe and Mail:

“U.S. and Canadian bonds had been rallying prior to the disaster in Japan, as instability in the Middle East caused concern about higher oil prices, prompting investors to move into the relative safety of fixed-income instruments. Between March 3 and March 10 – the day before the quake – five-year Canadian bond yields dropped by 16 basis points as bond prices rose.”

And then the earthquake hit – and financial markets panicked a bit.
Basically, when uncertainty exists in other countries, investors look for the safe haven. With Japan thrown into uncharted economic territory and with ongoing uncertainty in the Middle East, Canada looks like a pretty good place to park your money.
And when the demand for something rises, so does the price. The price of bonds is basically the inversion of the yield you receive from them. So when the price goes up, yields go down. And, voila, you have lower long-term rates for fixed-income securities.
Thing is, fixed mortgage rates are primarily controlled by the bond market. So when yields go down in the bond market, it’s a pretty safe bet that fixed mortgage rates are going to fall as well.
So, in the end, Canadians can get cheaper mortgages because of earthquakes in Japan and problems in the Middle East. The world is a strange place.
**An interesting aside. . . Many industry experts expected rates to increase this year. But our Central Bank did not raise rates and now with these cuts, you can probably expect some revisions in the outlook for the housing market in 2011.

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