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

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?