Five year vs. Ten year mortgage rates

The five year rates currently advertised is a record low 2.98%; 10-year rates are around 3.84%.

With the best floating rate mortgages currently at prime minus 0.25% (prime currently being 3%), it seems fairly obvious that a 5-year fixed rate is an optimal solution compared to floating rate mortgages.

However, the 10-year rate, while historically at record lows, assumes that your next 5-year renewal will be at 4.7%, which still is relatively low historically. That said, there is no optimal answer – it depends on one’s risk tolerance and other factors, such as the leverage ratio of the debt. The spread between 5 and 10 year money on the bond market is currently 0.53%, so a consumer locking into the 10-year rate of 3.84% is overpaying slightly when comparing the true cost to the bank – which is why the banks are probably trying to muddy the waters by getting people on 10-year mortgages.

There is also an implicit bet on inflation with the selection of term – if you expect inflation to rise significantly in the next five years, go with the 10-year rate. If you expect inflation to be roughly the same or, heaven forbid, deflation were to strike the economy, then go with the 5-year rate and you will probably receive just as good a renewal rate.

At 2.98%, the banks are not going to be making much money on 5-year mortgages. It may be tempting to look for a little more levered spice in your portfolio and spread it in bonds of companies that will have a very high chance of paying back their investors with roughly the same duration structure – e.g. Rogers Sugar convertible debentures (TSX: RSI.DB.C) maturing on April 30, 2017 has a yield to maturity of 4.75% (just make sure to note there is call risk as the debt is trading above par). Of course, every institutional investor on the planet is trying to do this on margin as well, so your compensation accordingly is less than 200 basis points and is certainly not “risk-free”.

Buying bonds, selling stocks

Whenever I see a headline like this:

Goldman Sachs: Best Time in a Generation to Buy Stocks, Sell Bonds

… I’m guessing the bond market hasn’t reached a high yet. Every trader on the planet is looking at the 40bps rise in 30-year bond yields over the past month and is wondering whether they should pile in short or wait, and I guess Goldman just answered that question.

Apple

Apparently Apple is going to announce at 6:00am Pacific time what they are planning on doing with their cash stack.

My best guess is that they’ll give out a regular dividend. It will be around $3-4/quarter.

Whatever the company decides, it will have zero impact on its value, but the market will bid it up like crazy since a dividend means it can also be included on the eligibility list of six billion income mutual funds out there.

That said, everybody and their grandmothers are long on Apple. If you buy the Nasdaq 100 you have a ridiculously large fraction of Apple. The S&P 500 has over 4% of Apple. Apple has been going up parabolically since the beginning of the year, and while it has killed the equity of a lot of short sellers, a parabolic trajectory up cannot be sustained indefinitely.

This type of catalyst kind of reminds me of what happened back in the internet stock days when they announced stock splits. Now the valueless news du jour is announcing dividends.

No positions. I don’t intend on going long or short – the best thing to do about this freight train is get out of the way and look for value elsewhere since Apple is doing a wonderful job of sucking capital from other worthy candidates.

Volatility

As anticipated, the S&P 500 made its break to the upside, and notably, volatility is at a significant low:

I haven’t had much time to devote brainpower to the markets over the past month, so I will have to leave it at that. It does appear, however, that treasury yields are slowly rising and the uptrend in the market is continuing. For how long?

Notably, an index investor in the S&P 500 will be up about 10-11% year to date.