Is another round of mortgage wars on the way?
Renewed concern around the crisis in the eurozone has investors heading for the exits, and once again Canada is emerging as one of the biggest beneficiaries with rising demand pushing yields on even corporate bonds close to record lows.
But analysts warn the soaring popularity is a double-edged sword. Bank funding costs have tumbled as well, and that typically translates into falling mortgage rates which in turn drive increased consumer borrowing — the last thing Canada needs according to its policy makers.
“What you’re seeing is a tremendous flight to quality in the Canadian market,” said Ian Pollick, a fixed income strategist at RBC Capital Markets. “In a world almost devoid of triple-A credit in the sovereign space, Canada is taking on a new importance.”
The yield on Government of Canada five year bonds, a market benchmark, slipped to a record low of 1.84% on Wednesday. And where government bonds go, so go bonds issued by banks.
Bottom line: It now costs a whole lot less for a bank to borrow money than it has historically.
According to Mr. Pollick, five-year bonds issued by banks to fund their home loans are enjoying such high demand that their funding costs are lower today than they were in the so-called mortgage wars of early February, “when we stated to see the 2.99% specials.”