Canadian Mortgage Rates Set To Rise As Yields Go “Higher For Longer”: BMO

Toronto Rental Rates Surged An Average of $1500:Year In 2016

Canadians have seen mortgage interest costs climb sharply, and they’re going to need to get used to it. The Government of Canada (GoC) 5-year bond yield opened at a multi-year high on Friday, hitting levels last seen in 2007. It’s not the only bond yield popping higher, and that means mortgage borrowers should brace for even higher costs. Those hoping for relief may be disappointed, as global yields climb and economists see borrowing rates heading “higher for longer.” 

Canadian Government Bond Yields Are Ripping Higher

The GoC 5-year bond continues to rise to highs no one thought possible just a few years ago. It opened with the yield at 4.26% on Friday morning, moving 17.14 basis points (bps) higher over the past five days. This has more than reversed the ground lost around a month ago, when expectations briefly softened. 

Yields for the bond have climbed sharply over the past year. Year to date they’ve increased a whopping 77.23 bps—just the increase has been larger than the overnight rate in 2021. The yield is 86 bps higher than a year ago. 

Yields Are Going “Higher For Longer,” and Mortgages Will Follow

Initially, the market generally saw higher yields as a temporary issue. However, inflation is proving to be more stubborn and global liquidity is shifting. Originally thought to be temporary, a rise in global yields indicates low yields after the Global Financial Crisis may have been the temporary trend. 

Canada isn’t immune to this global bond yield shift. “The drumbeat of higher for longer is spilling into long-term Canadian yields,” wrote Douglas Porter, chief economist at BMO. 

In his latest research note to investors, Porter explained this is the first time the GoC 5-year bond yield has climbed above 4.25% since 2007. That means consumers haven’t seen anything like this since before the Financial Crisis—more than 15 years ago. 

Canadian Mortgage Rates Set To Hit The Highest Level Since 2007

Porter’s team has previously warned this issue is approaching, but the shift is still hard to digest. “While not shocking, given that overnight rates are at their highest since 2001, it’s notable that bonds are now more fully taking on the view that shorter term rates could be at this level for a while. Note that five-year yields were below 3% as recently as early May, less than five short months ago” 

Rising yields aren’t just an issue impacting 5-year credit terms, but they’re being observed across the board these days. “Along with the run-up in five-year yields, twos are now taking direct aim at 5% (the overnight rate), while 10s are just shy of 4%—a level they haven’t touched since 2007,” warns Porter. 

That means few paths to any mortgage relief in the near term. Previously some segments had lagged due to the assumption of elevated yields being unlikely to last. Now with yields climbing across all credit term lengths, expect any discount between products to shrink.  

Buckle up, because this has been a global trend. Almost as fast as yields collapsed in the 2000s, they’re rising back to normal in the 2020s. This new reality also has experts pondering if that means asset values need to adjust, especially real estate. We’ll find out if this is the case soon enough, won’t we? 

9 Comments

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  • Frank 5 months ago

    Surely this global shift has nothing to do with wealth transfer and own nothing and be happy? Too many grey hairs are ready to retire placing a massive strain on government pension plans. Many are putting retirement off. The system is rigged, and is in full greed mode.

  • greg 5 months ago

    why would we want mortgage rates to fall? 6-7% is still low… there is no way they should ever be 0-5% ever! that was a huge mistake for them to ever do that in the first place. 6-10% is a good spot.. it forces people to be responsible and save and it weeds out people sitting on real estate as an investment as they could better allocate their money better elsewhere for a better return.

    Ontario for example has a median salary of 58k a year… how in the world are the average mortgage rates at almost 1 million.. the bank should never be allowing 5-10x mortgage vs income rates it’s so stupid.

  • Jon Morbey 5 months ago

    Trudeau will step in and fix this.

    • Paul 5 months ago

      Both the BOC and the govt have nothing to do with this. It’s the banks you might want to talk to.

    • Scott MacKinnon 5 months ago

      Just like his father did? I still have 20.00 on Junior taking “a walk in the snow” next Feb. 29th. We can only hope…

  • Fraser 5 months ago

    This puts a smile on my face….rates need to go much, much higher….prices need to come down big time….patience, patience, deals are coming….lollllllll

    • Chris 5 months ago

      Yep, makes me wonder how gullible RE agents think we are… cost to carry a mortgage up 30% with interest hikes and they try to entice us with a $30k price cut on a one million dollar house…

  • Joe 5 months ago

    This higher-for-longer situation puts our government’s Modern Monetary Theory, so-called MMT, to shame. The Theory espoused unending deficit spending, especially when interest rates were negative. Now, how can we afford the interest payments on our government debt without destroying other worthwhile programs? A rhetorical question!!

    • Scott MacKinnon 5 months ago

      Recessions weed out inefficiencies in the market. Unfortunately, they don’t do the same for government programs and initiatives…

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