Why the disconnect between Prime and Bond rates?

Consider this:

– the Canadian 5 year bond yield was 3.751% on Dec. 5/06
– the Canadian 10 year bond yield was 3.873% on Dec. 5/06
– Canadian prime rate was 5.50% last summer

Today:

– the Canadian 5 year bond yield is now 4.77%
– the Canadian 10 year bond yield is now 4.73%
– Canadian prime rate is 6.0%

So, five year money has backed up 100bps while the floating rate – which serves to drive the pricing for so many traditional bank loans and operating lines – has only moved 50bps. In part, this can be explained by the modest move in the short end: 3 month Canadian bills have risen only 26 bps since last August.

One might think that rising long term rates will, eventually, require the short end to play catch-up. Only the Bank of Canada knows for sure, and they seem correctly focussed on inflation and a high Canadian dollar right now.

The mortgage market has certainly changed, with postes rated up over 100bps in a year.

In venture debt land, however, interest rates are flat during the same timeframe. Might explain why our Fund has just finished our best two quarters in our 7 year history.

MRM