Canadian Bond Yields Surge, Mortgage Costs To Climb Ahead of Spring Market

Canadian real estate markets picked up at the end of the year, as cheaper mortgage debt appeared. Expect the opposite pressure over the next few days as Government of Canada (GoC) bond yields surge on strong inflation data. Reversing some of the ground made over the past few weeks, a sudden jump in yields is expected to take mortgage rates higher ahead of the Spring market. 

Falling Yields Helped Drive Canadian Fixed Rate Mortgages Lower

Canadian real estate markets have seen a boost in buying activity recently, driven by cheaper financing. The Bank of Canada (BoC) has yet to cut the overnight rate, which influences variable interest products. However, government bond yields have been coming down, the 5-year in particular. It peaked in October, and helped to drive the cost of 5-year fixed mortgage rates lower. 

A 5-year fixed rate mortgage is nowhere as cheap as it was pre-pandemic. However, such a highly speculative market has resulted in an uptick of buying whenever cheap financing begins to appear. This has helped to drive the recent home sale recovery everyone is talking about. However, mortgage rates are heading in a new direction. 

Canadian Bond Yields Are Surging Higher, Mortgages To Follow

The 5-year GoC bond yield has been ripping higher recently. This morning it opened at 3.792%, touching as high as 3.836% in early trading. Over the past 5 days, the rate has climbed 0.2763 points—a considerable increase for just a week. Zooming out, we can see this isn’t a short-term pressure over a few days. 

Government of Canada 5-Year Bond Yield

The Government of Canada 5-year bond yield, which directly influences 5-year fixed rate mortgages.

Source: Bank of Canada; TradingView.

The GoC 5-year bond yield peaked in October, generally moving lower through December and most of January. It appears to have found its footing towards the end of last month and reversed course to drive yields 0.626 points higher year-to-date. The yield is now 0.412 points higher than the same day last year, and at the highest level since this past November. There’s still a considerable gap to return to the October peak, but the yields appear to be trying. 

The pressure driving this trend is a combination of strong data and persistent inflation concerns. Despite concerns the country is already in a recession, the headline data produced continues to show a healthy economy—though some looking at the data in detail may disagree. 

At the same time, BoC deliberation notes revealed a central bank more worried about inflation than it has been letting on. They specifically have concerns regarding the breadth of elevated inflation, and elevated Core CPI. US CPI data coming in much hotter than expected certainly didn’t help today’s trading day either. 

All of this boils down to more uncertainty regarding when inflation will moderate. That uncertainty is translating into higher government bond yields, and thus higher mortgage rates are expected in the coming days. Just in time for the busy Spring market.

6 Comments

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  • Jojo 2 months ago

    Flavor of the week

  • Craig R 2 months ago

    Low interest rates fuel inflation, the housing crisis, generational unfairness and environmental collapse. Time Goverments stopped borrowing from the future to buy votes in the present.

    • pulamea 2 months ago

      unless you grab pitchforks and revolt, nothing will happen

  • Bill P 2 months ago

    Olivia “Tax Them High” Chow, received the renters vote, subscribing to the “gimme that” cheap housing (Ontario subsidized housing) dream/promise…work hard and invest wisely when you are young and you too, will be the envy of future generations…

  • Scott 2 months ago

    Can the real estate industry be taken to the competition tribunal? They are claiming that now is a good time to buy because interest rates will be coming down soon.
    When did real estate shills become experts in the bond market?
    You guys at BD must be quaking in your boots with this competition…

  • Doug Fletcher 2 months ago

    The BoC is caught between a rock and a hard place. The amount of mortgage debt coming due and being refinanced at much higher rates is going to take a significant bite out of disposable income in the economy, not to mention the cumulative impact of higher rates on business investment and dampening job growth. The risk of a severe recession has to be on their minds… easing the rates down is necessary, and must start soon, to alleviate that risk.

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