It’s not just the stock markets that have lost their heads. For several weeks, the capital market has also experienced strong turbulence. And since this is the place where the mortgage banks refinance themselves, mortgage rates have suffered the direct consequences.
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Two attentive observers of the rates offered by banks, insurance companies and pension funds reported this phenomenon. Comparis, first, reported on Wednesday that the all-time low of 0.98% for 10-year rates in early March had fizzled. Now it is 1.19%, notes the comparator. Thursday was MoneyPark’s turn. In one month, notes the latter, the indicative mortgage rates – the average of the rates published by lenders – for ten-year fixed maturities increased by 17 basis points to 1.25%.
The opposite of normal
The coronavirus crisis and the financial panic that it generated had counterintuitive effects. Usually, during turbulent times, investments considered risk-free, like bonds of certain states – the United States, Switzerland, Germany, Japan, etc. – are favored by investors. Their price increases and, therefore, their expected annual yield decreases. However, this time, the opposite happened. Investors sold these bonds with one and the same objective: to have liquidity.
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Switzerland has not been spared. Confederation bond yields rose sharply from -0.9% to -0.3% between March 9 and Thursday, April 2.
The consequence is the rise in swap rates. That is, the prices at which banks can refinance themselves on the capital market. On March 9, this ten-year swap rate was still -0.61%, compared to -0.19% now. This movement, since the announcement of the support programs of the States and the central banks, has slightly diminished. But the difference between late February and late March is 35 basis points, notes MoneyPark. On the other side of the bank balance sheet, mortgage rates have followed this trend.
The following? Even if the capital market normalizes, mortgage rates may not do the same. MoneyPark mentions, among other things, teleworking which slows down the processes in banks, thus increasing costs. As well as the current focus on business bridge loans, which could, at least temporarily, reduce the competitive underbidding that borrowers benefited from.
