Canadians should prepare to pay a lot more to borrow for a mortgage, as easy credit comes to an end. The Government of Canada (GoC) 5-year bond yield reached 1.978% today, the highest level in well over a year. A booming economy and soaring inflation are driving yield expectations higher. As the GoC 5-year bond yield rises, expect the 5-year fixed-rate mortgage to climb as well.
Government of Canada Bond Yields Influence Fixed Rate Mortgage Costs
The GoC 5-year bond yield influences credit of similar terms, including mortgages. Since credit markets are competitive, bond issuers compete for investor capital. The Government, being one of the least likely to default on bond payments, gets the cheapest rate. As risk for the product climbs, the cost of interest paid to bondholders increases as well. This includes the bonds that are used to fund mortgages.
The GoC 5-year bond yield directly influences the cost of 5-year fixed rate mortgages. As it rises, mortgage borrowers entering a contract will pay more as well. Borrowers will also pay less if rates fall at the time of borrowing. That’s how inflation programs like quantitative ease (QE) work. The central bank drives down bond yields to stimulate things like mortgage borrowing.
Canadian 5-Year Government Bonds Jumped To The Highest Level Since 2018
The recent move for the GoC 5-year is highly unusual to say the least — though not unexpected. Over the past five days, the yield rose 38.04 basis points higher. Remember, a full rate hike is 25 bps, so that’s massive for just five days.
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.
Annual growth from the near record low came in at 94.44 bps, a big surge. The GoC 5-year bond hasn’t seen yields this high since 2018, back when the overnight rate was over 3x higher at 1.75%. These bonds, as well as fixed mortgages, have climbed along with rising expectations. The increase also highlights how far behind the curve the Bank of Canada (BoC) is with the overnight rate.
It’s important to remember this segment only influences 5-year fixed rate mortgages. As these increased, borrowers have flocked to much cheaper variable rate mortgages. Variable rate mortgages are based on the BoC overnight rate, which has lagged producing a big gap between mortgage funding costs. Now with rates finally poised to climb for both the 5-year and variable rate products, the end of cheap money for home buying is near.
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” 5-year bond yield reached 1.978% today, the highest level in well over a year.”
It is actually the highest level in more than 3 years.
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