Canadian Bond Yields Hit Pre-Pandemic Levels, A Sign Higher Mortgage Rates Are Near

The Canadian bond market is sending real estate a message — credit is going to tighten. Government of Canada (GoC) 5-year bond yields hit the highest level in a year today. Yields for the segment are now triple the level they were last year. Since GoC bond yields influence mortgage rates, this will drive the cost of a mortgage higher.

Government of Canada 5-Year Bond Yields and Mortgages

The GoC 5-year bond yield is related to the interest charged on mortgages of similar lengths. Credit markets compete by looking for lenders willing to part with their money. Mortgages are a little less secure than GoC bonds, so they pay higher yields.  After all, if they charged the same rate, why wouldn’t you just get a government bond? They need to add a premium, usually somewhere between 15 and 30 basis points. As the 5-year bond yield rises, so does the interest cost for an insured 5-year fixed-rate mortgage.

Rising rates are generally good news, meaning the economy needs less stimulus. Higher financing costs tend to consume more income, and reduce profits though. Therefore it tends to cool demand for goods, which can slow the economy’s growth. This makes it much more difficult for home prices to rise. During the pandemic, the opposite happened, and bond yields dropped like a stone.

GoC 5-Year Bond Yields Have Climbed Nearly 50%

Canada’s 5-year bond yields surged to the highest level in over a year. The yield hit 1.244% on October 12, 2021, up 13.64 basis points (bps) from 5 days ago. Compared to a month before, yields have now climbed 44.19 bps — nearly a third of the current yield. This is an extremely sharp climb, especially for a recessionary environment. 

Government of Canada 5-Year Bond Yield

The percent yield of the Government of Canada’s 5-year bond.

Source: Bank of Canada; Better Dwelling.

GoC 5-Year Bond Yields Are Back To Pre-Pandemic Levels

The pandemic might not be over, but the outlook for the economy is in a completely different place. Last year at this time, yields were hovering around 0.36% after getting some sharp cuts to the overnight rate. Now they’ve climbed more than triple that level, and are at the highest rate since February 2020. That’s right, it’s at the highest rate since before the pandemic was declared. Except this time, it’s accompanied by a much higher unemployment rate, and driven by inflation.  

BMO recently suggested this is the ideal time to lock in rates since we’re just off the bottom of the cycle. The only thing that can keep them from climbing is a sudden demand shock or a double-dip recession. Neither are totally out of the cards, but that would be a real recession, instead of an induced one.

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  • GTA Landlord 3 years ago

    BOC is focused on controlling long-term debt yields, with steepening of the curve. If they’re forced to raise rates abruptly, then they’re definitely going to be looking at another recession signal. Geniuses, these idiots.

    • FOMO 3 years ago

      Remember they started the mortgage bond purchase program before the pandemic. They were worried prices were going to crash even before they got a license to print.

  • Fazid 3 years ago

    ** popcorn **

  • Lauren Maddox 3 years ago

    If I’m not mistaken, doesn’t this have zero impact on the cost of housing considering people have already been stress tested?

    • Terry 3 years ago

      Other spending is diverted from the economy, causing slower economic growth. The funny thing is with things like gas prices, the economy is surging higher, but the net sale of fuel is largely just due to increased costs since inflation doesn’t properly capture it.

    • sn 3 years ago

      You mean the stress test I passed by getting my whole family to co-sign? lol Any mortgage broker worth his salt could get you credit if you want – in some cases without even a down payment (go on Kijiji for no down mortgage).

      • Alex 3 years ago

        Hell, you don’t even have to get them to co-sign, just draft up a rental agreement on MS Word saying they’re going to pay exorbitant amounts to live in your basement, and use that as income in your application.

  • Terry 3 years ago

    I think a lot of people would appreciate more details on how high inflation is causing yields to rise, not an economic recovery. I mean, GDP might be recovered due to prices rising higher than inflation can capture, but this is very clearly about the inflationary environment.

    • Itchy Bear 3 years ago

      Yields have been low or negative because the market has been pricing debt in the context of expectations that developed economies would face deflation or at least remain stuck at the zero lower bound.
      If inflation is going up, people expect greater return for their money and demand higher interest rates. The price of bonds fall to produce a higher yield on debt.

    • sn 3 years ago

      This isn’t complicated – bond prices low, yields go up, and vice versa. No individual, including Tiff Macklem, would buy a bond today that is sure to lose money. The only game in town is institutional money. Once the BoC comes out openly in disregarding their legal mandate to manage inflation, institutional money managers would be violating their fiduciary responsibility to ensure returns and wouldn’t be liable to continue buying bonds; pushing yields higher still. If the safest instrument in the world, US Treasuries, got dumped in March 2020 by emerging market central banks, the attractiveness of Canada’s debt is anybody’s guess.

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