Divestor

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”.

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.

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.

So the Greek debt crisis gets averted for another year or two until they have more problems, and the markets are back to their local highs, per the chart:

Do we go higher? My guess is yes, but not for long. Just have to be patient.