Canadians waiting for interest rates to fall might be a little disappointed. The Government of Canada (GoC) 5-year bond yield popped to a new multi-year high again. The yield is an important measure for the market, influencing the cost of similar length mortgages. They aren’t alone—almost all bond yields are rising under the same conditions, leaving fewer places for borrowers to hide. At least one major bank in Canada is trimming their forecast for rate cuts, as the world embraces “higher for longer” monetary policy.
Half of Canada’s 5-Year Bond Yield Annual Growth Happened In The Past 30 Days
The GoC 5-year bond yield has been ripping higher over the past few days. The yield reached 4.338% by market close yesterday, climbing more than 7 basis points (bps) in a single day. Over the past month, the yield has climbed 43.9 bps, representing nearly half of the total increase in the past year. To say the yield is moving quickly would be a gross understatement.
Canadian Borrowing Costs To Hit The Highest Level Since 2007
The yield for this bond places it at the highest level since 2007, and it’s getting close to breaking above the 2007 peak. That’s going to lead to even higher 5-year fixed rate mortgages in the next year. Yields are rising across all segments, in most advanced economies too, which is likely to push all fixed term mortgage rates higher.
BMO Sees Fewer Rate Cuts Next Year After Yield Surge
If you’re waiting for interest rate cuts to at least drive variable rates lower, you might be disappointed. BMO is the first out the gate to adjust rate cut expectations on yields going higher for longer. They now see just two rate cuts next year— one 25 bps cut in Q3 and one in Q4, leaving the overnight rate at 4.5% by year end. This forecast revision is 25 bps lower than they had previously anticipated, which they attribute to climbing global yields.
“This reflects the theme of ‘higher for longer’ amid continued economic resiliency (but less so now in Canada) and inflation stubbornness,” wrote Michael Greogory, deputy chief economist at BMO.
Hikes should reduce the ease related to monetary stimulus, but the economy is taking them in strides. He cites economic strength, elevated inflation, and rapid population growth as contributors to smaller cuts. Consequently, they don’t see the “ease” being worked out of the economy until at least 2025. That will result in higher interest rates across the board for much longer than many thought possible just a few months ago.