Make no mistake: The scales have tipped in favour of variable mortgage rates

financialpost.com:

One week into the new Bank of Canada rate cut cycle, bond yields are plunging like an Olympic diver without a splash. The nosedive stems from growing belief that North American inflation will settle back down to the two per cent mark beloved by the Bank of Canada and the United States Federal Reserve.

And it will. Central banks always win.

In fact, there will come a time — probably next year — when mortgage borrowers say to themselves, “Here I am, stuck in fixed, while that variable rate peak was as obvious as a comb-over in a strong breeze.”

But that’s life. Hindsight is inevitable. So is the fact we’ll see economic data over the next year that makes everyone second guess inflation’s defeat.

And to be clear, the 200 basis points of rate cuts the market is pricing in over the next 32 months — according to forward rates tracked by CandDeal DNA — are far from certain. For that reason, I’d be the last to call anyone crazy for not floating their mortgage.

What we can say is that, despite all the risks, the scales have tipped in variable’s favour. That’s true for all sorts of reasons including the tendency of rate carry-through after the first Bank of Canada rate cut, the downward momentum of inflation, the upward momentum of unemployment, implied forward rates in the bond market, the inverted yield curve, academic research and the variable-rate prepayment advantage (most variable rates let you lock in anytime, or get out early with just a three month interest penalty).

Meanwhile, the difference between the leading uninsured nationally advertised variable (6.10 per cent) and fixed (5.14 per cent) has shrunk to 96 bps. That’s the smallest rate advantage for fixed terms since last fall.

However, if we take a leaf from the book