Canadian interest rates might be coming down but the bond market is signaling higher mortgage rates. The Government of Canada (GoC) bond yields have reverse coursed and begun to climb sharply since central bank rate cuts earlier this week. Rising yields directly impact the cost of financing fixed-rate mortgages, which have been the most affordable borrowing tool offered. Those waiting for further rate cuts might be disappointed as bond yields surge post-rate cuts.
Government Bond Yields Surge Since The BoC Rate Cuts
The GoC 5-year bond yield is rising sharply, and that’s going to push fixed-rate mortgages higher. The GoC 5-year bond yield climbed 4 basis points (bps) since opening this morning, hitting 2.97% by midday. Yields have climbed 19 bps since Wednesday morning, when the Bank of Canada (BoC) cut rates. They’re up 30 bps over the past 3-months, and that’s going to cost buyers more.
Those not in finance may need to see how big of a shift this can be on their finances. For example, let’s assume the 19 bps increase since Wednesday morning is fully reflected in the lowest 5-year fixed rate mortgage rate. That would reduce max leverage by 1.9%, and result in paying 4.7% more in interest over the term. Once again, these numbers seem small but the math for a household earning $100k per year can mean going to work for a whole extra month to pay for the 3-day move.
Canada’s Lowest Fixed Rate Mortgages Climb Sharply
The 5-year fixed rate mortgage hasn’t budged yet but other term lengths have. Data from mortgage comparison site WOWA shows conventional fixed-rate mortgages climbed yesterday for the lowest 2-year (4.3%; +20 bps) and 3-year (4.3%; +5 bps) terms. Similarly, high-ratio loans saw the 1-year (5.74%; +15 bps), 3-year (4.19%;+15bps), and 4-year (4.2%; +1bps) all rise yesterday too.
The recent GoC bond yield surge is a big change in direction from the past year. Even with the recent pull back, the GoC 5-Year bond yield is up 19.4 bps year to date (YTD), or 31.26 bps since last year. It is still a long way from the 3.9% peak reached earlier this year but yields are moving higher, not lower.
Yields are typically driven by a combination of factors, but they ultimately fall under two broader issues—inflation expectations and liquidity. Since investors don’t want to lend for less than they expect in return, signs of rising inflation boost expectations. The BoC may have delivered a supersized cut, but it also maintained a hawkish tone—future cuts won’t be as easily won. The monetary and fiscal stimulus are also inflationary behind the initial CPI shock from removing HST.
Liquidity also plays a big role when it comes to bond yields due to supply and demand dynamics. As demand for credit outpaces demand to lend, bond yields rise to increase incentive. The vote-buying measures from multiple levels of gov won’t be funded by a surplus, but through bonds. If investor demand remains weak, as has been the case, the increased borrowing will require higher yields to compensate investors.
How do they plan on funding the 30-year mortgages they’re going to need with the additional auth for $21b above the budget that they needed authorization for? A: they can’t. Not without QE anyway, which would be f*cked if that happens while the US is booming without it.
All about investors and the ability to manipulate markets for the best possible returns…on your back.
The Federal deficit is way over the target, otherwise the markets would not be moving. in this direction. What a trap. Unqualified people running this country, ruining the currency, ruining investment opportunities.
As I have been saying since the BOC started it rise in rates, monetary policy effectiveness had been used up and we are heading toward stagflation. The bills of the 2008, plus COVID plus our government policy, plus the export of jobs to low wage countries plus the import of Labour equals broken monetary policy and stagflation.
It’s pretty obvious that you guys at BD didn’t get any of the billions in consulting fees the Feds have paid out over the years. Too bad. There’d be a lot less hurting…
What is happening with rising bond yields is extremely dangerous.
Basically bond investors have lost trust in the feds and BoC.
The vigilantes want more yield if they are going to loan to governments. Rates can go higher, much higher.
This is the end.
Fear mongering to lock in. The BoC has no clothes, it’s dollars are the more worthless than ever in the G20. It’s ahead of Turkey, Indonesia, South Korea just through banking alone, wealth creation has stalled here for the last 8 years.