Financial Post article at bottom There are a lot variables in a variable rate supports the theory that if taking a variable rate product today, perhaps the 3 year term is a better bet than the 5 yr as “consumers getting into variable rate products are facing the risk that the discounts they negotiate today will look pretty ugly in a few months” as “premiums being offered are moving up and down wildly”.
Also below:
Globe and Mail article: Big banks balk at reform plans Canadian Press article: Weak economy could be with us a while
• TSX -113.43 to 10,958(Reuters)
• DOW -21.61 to 9,487
• Dollar +.17c to 92.38USD
• Oil -$.87 to $69.95US per barrel.
• Gold +$3.70 to $1,003.20USD per ounce
• Canadian 5 yr bond yields -.02bps to 2.49. The spread, based on 5 yr rate of 4.09% is 1.60% We are in the centre of the comfort zone
• http://www.financialpost.com/markets/market-data/money-yields-can_us.html?tmp=yields-can_us
This increase in bond yield is something to watch. If the bond yield continues to go up, the spread will continue to shrink and this could be a trigger for interest rates to rise. Ideally lenders are looking for a spread between 1.55 and 1.75
Weak economy could be with us a while, noted economist tells Waterloo audience
BY JOHN VALORZI
WATERLOO — A weak U.S. economy could be with us ”for a very long time,” as unemployment continues to rise, consumers remain tight-fisted and business spending fails to be the demand driver needed to help boost the recovery, says Nobel-winning economist Paul Krugman.
”I’ve got a bad feeling” about where the economy is headed, Krugman said late Saturday at an international economic conference sponsored by a Canadian think tank, Centre for International Governance Innovation (CIGI) founded by Jim Balsillie, co-chief executive of BlackBerry maker Research in Motion Ltd. (TSX:RIM.)
Krugman, the keynote speaker at the conference dinner Saturday night, said Friday’s U.S. weak employment report suggests U.S. workers will continue to lose their jobs until the end of 2010 before the employment picture starts to brighten south of the border.
The U.S. unemployment rate for September jumped to 9.8 per cent and the U.S. economy shed 283,000 jobs, far more than expected and the highest in 16 years. The report suggested that shell-shocked American consumers are not spending and any confidence-building jobs recovery is still far away.
In Canada, the unemployment rate for August rose to 8.7 per cent, the highest in 10 years, with continued weakness in manufacturing. The September unemployment report will be released by Statistics Canada on Friday.
While Wall Street has rebounded and the U.S. banking sector is recovering, ordinary Americans on Main Street are still feeling the recession’s effects, Krugman said at the Centre for Governance Innovation.
”I worry that this could go on for a very long time,” the Princeton University economist said in a news conference before his dinner speech to about 200 economists, policy analysts, and government and corporate officials from around the world.
Krugman, who won the 2008 Nobel prize in economics, said that while the massive U.S. government stimulus package has helped, that can’t bring recovery on its own and more public spending may be needed. Meanwhile, weak consumer and corporate capital investment spending means further rocky times ahead.
”It’s about source of demand,” he said, alluding to the Great Depression of the 1930s, where a decade of economic weakness ended only with massive public spending during the Second World War. ”Consumers can’t do it. Export-led growth isn’t going to work because it’s a global crisis. Not only do recessions caused by financial crises tend to persist but the recovery almost invariably depends on the crisis country (the United States) moving into a large trade surplus. Since this is a global financial crisis, we have a problem.”
Krugman noted that past recessions in 1990 and 2001 saw employment recovery within 18 months, something that isn’t happening this time.
For Canada, weak U.S. growth will squeeze the automotive, forestry and parts sectors, which ship most of their output to the U.S. market. But while Canada won’t grow like before unless there’s full U.S. economic recovery, our resources-based economy will benefit from high demand for oil, minerals, grains and chemicals from China, India and other Asian economies.
Earlier Saturday, other speakers at the conference predicted that the United States will lose economic power to China over the next decade or so and the Chinese will succeed in making their currency rival the U.S. dollar as Beijing sets up regional financial ties with Japan in Asia, broadens its trade and flexes its new-found economic muscle around the world.
One expert predicted that Hong Kong could become a global financial centre as it seeks to become the pipeline for Chinese financial flows in Asia and around the world.
”Coming through this crisis, will London and New York still be as powerful,” said Gregory Chin, a York University professor and senior fellow at the Centre.
The Centre for International Governance Innovation is a non-profit, not partisan think tank based in Waterloo that conducts research, holds conferences and publishes working papers and books and makes policy recommendations on international governance issues. CIGI focuses on international relations, global economic policy and multilateral policy-making.
The think tank is based in the former Seagram Museum in Waterloo and was founded by Balsillie, who, together with Mike Lazaridis, his co-CEO at Research In Motion Ltd. (TSX:RIM) made a donation in 2002 to establish the centre.
In 2003, the federal government provided a matching grant.
The Canadian Press
Big banks balk at reform plans Kevin Carmichael and Brian Milner
Istanbul and Waterloo, Ont. — Globe and Mail Update
The world's big banks are pushing back as the move by global finance officials for more stringent regulation gathers force.
Deutsche Bank AG chief executive officer Josef Ackermann, who leads Germany's biggest lender and chairs the International Institute of Finance, suggested on the weekend that efforts by the Group of 20 nations to require financial institutions to hold more money in reserve risked choking economic growth.
“The capital issue is important, but it's not as important as liquidity and profits,” Mr. Ackerman said. Policy makers should be wary that their efforts “could go too far and jeopardize real growth in the economy,” he added at press conference in Turkey's financial capital.
Mr. Ackerman made the remarks during a conference hosted by his 375-member lobby group in the same city at the same time that economic officials from the 186 countries that belong to the International Monetary Fund and the World Bank began annual meetings of the two institutions.
The response from policy makers who have deployed hundreds of billions of dollars bailing out failed financial institutions, buying toxic securities and guaranteeing banks' asset purchases was predictably snide.
“It was only a year ago that we were on the precipice of our international banking system failing and having a massive international crisis that would have affected everyone's normal lives,” Finance Minister Jim Flaherty said in an interview.
“I have a little trouble with bankers, who were participants in that, crying wolf … They are going to have to get used to effective, stringent regulation.”
With the banks profitable again, financial markets stable and tentative signs of recovery, policy makers such as U.S. Treasury Secretary Timothy Geithner and Bank of Italy Governor Mario Draghi are racing to lock in regulatory changes before they lose the political advantage.
Walter Mattli and Ngaire Woods, two professors at Britain's Oxford University, published research earlier this year that shows that the longer politicians wait to implement reforms after a financial crisis, the greater the chance that financial industry lobbyists and other specialists take over the process and water down reforms.
Mr. Geithner dismissed Mr. Ackermann's comments as “just lobbying.”
“There is always some risk that if you do it too quickly, or you do it poorly, you'll create a bunch of unintended consequences and you will restrain innovation too much,” Mr. Geithner told reporters Sunday. “But that's not the main risk we face. The main risk we face is making sure we sustain enough political will to put in place reforms that are going to be strong enough so that we can be more confident that this will be more stable.”
Less than two weeks ago in Pittsburgh, the leaders of the Group of 20 countries endorsed a plan to force banks to hold more and higher-quality assets as capital, restrict leverage ratios and demand that compensation be tied to longer-term results, among other measures. They called on their finance ministers to define and implement specific rules over the next couple of years.
Former Canadian prime minister Paul Martin said at a conference in Waterloo, Ont., yesterday that the G20's handling of financial regulation will be one of the issues that determine the group's success as an organization for ordering the world's economy.
Mr. Martin told a conference organized by the Centre for Global Governance Innovation that the G20 should demand mandatory, not voluntary, enforcement of co-ordination by an international body. Without it, financial institutions could seek out jurisdictions with the weakest regulatory systems, he said.
“The time for the G20 to draw the line in the sand is now,” Mr. Martin said. “While the right words were said in Pittsburgh, it's far from clear that all of the G20 members are prepared to live up to their commitments.”
In Turkey, Mr. Draghi, who also heads the Financial Stability Board, a grouping of international regulators that's responsible for coming up with new regulations, said banks will have lots of time to get used to new rules.
The “new rules will be set out by year-end, will be calibrated next year” and “they will be phased in as conditions improve and recovery is assured with the aim of implementing them in the years 2011 and 2012,” Mr. Draghi told reporters, according to Bloomberg News.
There are a lot variables in a variable rate
Garry Marr, Family Man, Financial Post
He has a landmark study on mortgages, but York University professor Moshe Milevsky says he never anticipated the credit markets of the last year.
The 2001 paper examined the previous 50 years to determine whether consumers benefitted from locking into a fixed-rate mortgage or going with a variable-rate product linked to prime. Consumers did better 88% of the time by going with the variable-rate option. The study has been used by banks to lure consumers into variable rate products. Currently, about 25% of mortgage holders have gone with floating rates.
"I've written seven books and 100 research articles and that's the one I'm known for," says Mr. Milevsky, with a laugh. "I just wish some of these banks would mention the author."
He says the study results still hold true. If you factor in the past nine years, the variable rate probably does better about 96% of the time.
But that doesn't mean if you are looking for a mortgage today you should float, he says. "There is another element of risk to analyze," says Mr. Milevsky.
He's refering to the volatility in the mortgage market for variable-rate products. The variable rate is still tied to prime, but the discounts and premiums being offered are moving up and down wildly.
A year ago, consumers were being offered discounts as much as 90 basis points below prime, meaning those people who took it are now borrowing at 1.35% based on the current prime rate of 2.25%. When credit markets tanked a year ago, variable products were being sold at 100 basis points above prime.
Credit markets have calmed since. Bank of Montreal announced a week ago that its variable rate was down to 2.25%, with no discount or premium.
The Bank of Canada may have pledged to not touch the rate until next June, but consumers getting into variable rate products are facing the risk that the discounts they negotiate today will look pretty ugly in a few months.
Worse yet, the variable products being sold by the banks are generally closed mortgages, so they cannot be paid off immediately without penalty.
An open mortgage can be paid off at any time, but you pay a higher rate for the privilege. At Bank of Montreal, for instance, an open three-year mortgage costs 3.05%, so you are paying an 80-basis point premium.
"It's important to understand what kind of flexibility features you have in your mortgage," says John Turner, director of mortgages with Bank of Montreal.
With such confusion in the marketplace, these days even Prof. Milevsky is leaning somewhat in favour of the five-year closed fixed-rate mortgage. On a discounted basis, some banks are offering rates as low 3.69%.
"At some point, people have to ask themselves if they can afford the fact that eventually these things are going to go up, whether it's in one year, two years or five years," he says.
gmarr@nationalpost.com
Read more: http://www.financialpost.com/news-sectors/story.html?id=2059901#ixzz0T3opKCUa
Monday, October 5, 2009
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