Canadians’ borrowing costs getting pushed up - Fixed Rates Rise

If worries about the sickly U.S. economy and Ireland’s rocky financial situation seemed remote a few days ago, they shouldn’t anymore.
Those global concerns are pushing up Canadians’ borrowing costs when it comes to buying a home.

TD Canada Trust and the Royal Bank of Canada said separately that they are increasing some of their fixed-term mortgage rates by as much as one-quarter of a percentage point, effective Wednesday.
At both banks, five-year mortgages, one of the most popular among Canadian homeowners, will rise by 0.25 of a percentage point to 5.44 per cent.

Rates on three- and four-year mortgages are also increasing by a quarter of a percentage point, while one-and two-year rates will go up by 0.15 of a percentage point.
Rates for mortgages that have six, seven, and 10 year terms will be unchanged.

Five-year mortgages rates in particular are closely tied to yields (rate of return) in the bond market, which have recently rebounded, following about three months of declines.

That means Canadian banks have been paying a higher rate to borrow in the bond market in order to lend to customers. “In the past month, the five-year bond yield has risen quite substantially, given that rates are so low,” said Francis Fong, economist at TD Economics

While Canada’s economy remains relatively strong and the Bank of Canada has been hiking interest rates, concerns over the U.S. recovery continue to simmer.

The U.S. Federal Reserve hinted in late August that it planned to take additional measures to jolt the moribund U.S. economy back to life. Its preferred approach, quantitative easing, amounts to pumping more money into the economy.

The market began pricing in the Fed’s anticipated intervention, though it would take another two months to get all the details - a further $600 billion (U.S.) purchase of Treasury securities.

Since then, yields have rebounded. “The market was likely waiting a bit for the details to see what the price of bonds should really be,” Fong said, adding that the process is similar to the anticipation of a company’s stock price prior to an earnings announcement.

Anxiety in Europe also continues to play a role in the bond market as nervous investors demand higher yields in exchange for higher risk.

Irish bonds fell Tuesday as the prime minister expressed doubts that an agreement to resolve his country’s fiscal crisis could be reached at a meeting of European finance ministers.

Investors are also nervously watching as Greece and Portugal make attempts to manage their own massive fiscal crises.

Meanwhile, North American stocks fell broadly, in part due to concerns about Europe's debt problems, which may have helped demand for U.S. Treasury debt.

With files from the Star’s wire services - Source: By Madhavi Acharya-Tom Yew | Tue Nov 16 2010