Pimco CEO talks about investing to reach double digit returns

You have to take note of an article when its written from an interview with the CEO of a $1 trillion dollar investment firm.  Sure, the magazine article was written some 3 ½ months ago but it continues to have merit.  CEO’s of large firms don’t provide insight for the short-term (usually) but rather on what is to come.

Pimco’s Mohamed El-Erian has earned his status as one of the investing world’s rock stars and he’s not only the firms CEO, but also its co-chief investment officer.  His book “When Markets Collide: Investment Strategies for the Age of Global Economic Change” won the Financial Times Goldman Sachs business book of the year last year and prior to Pimco he managed the mammoth Harvard University $30 billion endowment.

But the $30 billion, the $1 trillion, and the book awards are not what caught the eye… it was the guts of the article written in the December 21, 2009 Fortune magazine that did. Geoff Colvin was the interviewer during this sit down session with Mohamed and he asked some very good questions.  More impressive were the answers!  In particular the questions about achieving double digit returns on investments.  Mohamed states, “there has to be a certain realism as to what your investment portfolio can do for you, and it cannot produce double-digit returns on a sustainable basis. That’s just a reality.  So return expectations have to be more realistic, unless you’re willing to go from the liquid markets to truly illiquid markets.  There it’s very different.  It’s all about completing markets.  It’s a very different game, but you don’t have the liquidity that most people want” Geoff Colvin then asks, “Examples of illiquid markets would be?” … to which Mohamed responds, “Investing in a mortgage company in Brazil. You’ve got to do it knowing that it is a long-term investment and that liquidity is not going to be there.”

Two thoughts came to mind…

1. You don’t necessarily have to go to Brazil to find a good mortgage investment, and
2. You don’t have to settle with being multi-year illiquid

Learn about Alta Pacific Mortgage Investment Corporation and you might find both… right here in Western Canada.

If you have any questions, please don’t hesitate to call or email us.  Our contact details can be found on our website.  We’d be happy to chat with you about questions you have about investing in a Mortgage Investment Corporation (MIC).

Alta Pacific Mortgages

Security. Growth. Transparency.

Inflation surprise spurs rate speculation

Inflation is above target for the month of February, leading analysts into a bit of a frenzy.  While this could lead to a rate hike earlier than expected, many also believe the buzz of the Vancouver 2010 Olympics drove prices up temporarily. Source: today’s National Post

As mentioned in that article, don’t expect Bank of Canada to lose sleep over the report, as Vancouver accommodations and Olympic spending no doubt played a part in those numbers.    That said, we have seen a slight increase in bond yields this morning, although no more so than the moderate gains and losses seen over the last couple of days.

There are many factors that affect rates.  The Canadian dollar for one, which is trading at near parity today (partly due to inflation data).  How does this affect our rates? It’s hard to say, a 30 point jump in bond rates last week resulted in lenders lowering their posted 5 year mortgages, trying to make sense of these factors only leads me to one conclusion, which is that there’s no foolproof way to tell what rates are going to do.

If you have any questions, please don’t hesitate to call or email us.  Our contact details can be found on our website.  We’d be happy to chat with you regarding questions you have about Mortgages and Interest Rates.

Alta Pacific Mortgages

Security. Growth. Transparency.

By Scott Hiebert

Should you be locking in your mortgage?

It’s no secret rates are going to rise this year, the question is how much and how fast?  Some sources say rates are going to rise .50% at every meeting until mid 2011, and there are few articles contesting that.  The question is will they wait until their set date to keep rates low?  Most are betting yes.  But what does that mean for mortgage holders?  Should they wait until June to lock in?  How exactly does the Central Bank rate affect the fixed mortgage you lock in to?

5-year mortgage rates aren’t directly influenced by the Central Bank Rate.  It’s automatically assumed that when the Bank of Canada (herein referred to as BoC) raises their rates a quarter point, the new 5-year mortgage will go up by the same.  This isn’t the case.  What affects your 5-year mortgage is actually investors in the market. They try to measure the market and predict what they think rates will be over a 5 year period.  The banks will then buy money at that price and lend it out to you as a 5-year mortgage.  They usually look for a spread of anywhere from 1.4% to 1.8%, depending on the lender.  They need to make money too you know!  If investors think rates are going to go up, this is reflected in the bond rate (which you can see HERE), which dictates what the lenders will be offering on their mortgages.  Today’s Bond rate closed at 2.5%, which is inline with lender’s 5-year rates of about 4%, giving them a 1.5 point spread.

Variables are much the same.  Today’s central bank rate is .25%, which means qualified lenders borrow money at that rate and lend it to consumers.  This is usually translated to consumers as the “prime rate”.  The prime rate typically has the same spreads as the bonds and currently stands at 2.25% giving a spread of 2 points.  Depending on the products/qualifications, borrowers can borrow money at either a bit higher or lower than the prime rate.

So what does this mean to you?  It means that rates can move at any time and there isn’t any set formula for what you should do.  It’s not black and white.  While BoC has their set dates for setting monetary policy, the market doesn’t, and the spreads which the banks need can change daily.  For example, the overnight rate today is at .25%, in July 2007 this same rate was 4.5%.  That doesn’t automatically mean that mortgages were 4% higher.  5 year mortgages were still under 6% and variables were in the low 5% range.  Even the bond rate spread can change.  Taking  a look at this graph you can see the huge difference in bond rates from a year ago.  And yet we’re still at the same rates with the lenders.  Tolerances change with the times and the anxiety of the market.

Canada 5-year Bond

So while this may not have answered the million dollar question as to whether you should wait to lock in your mortgage, or jump on the wagon now, it should give you more insight into what REALLY drives the wheels behind rates.  What’s important is to find knowledgeable professionals that can keep you apprised of the situations that affect your mortgage and listen to their advice.

If you have any questions, please don’t hesitate to call or email us.  Our contact details can be found on our website.  We’d be happy to chat with you regarding questions you have about Mortgages and Interest Rates.

Alta Pacific Mortgages

Security. Growth. Transparency.

By Scott Hiebert