Canadian Mortgages To Surge Higher As Bond Yield Hits 16 Year High

Buckle up, Canadian mortgage rates are about to climb even further in the coming weeks. The Government of Canada (GoC) 5-year bond yield closed Thursday at a 16-year high. The yield directly influences a key mortgage rate, meaning interest costs are about to head in this direction as well. At least one Big Six bank anticipates this yield surge will slow home prices and sales even further. On the upside, the bank explains that higher bond yields are traditionally linked to higher wage growth.

Canada’s Government Bonds & Mortgage Rates  

The GoC government bond is one of the most important credit indicators. Since credit is competitive, the yield of these bonds influences the cost of loans over similar terms. The most prominent example is the 5-year government bond yield, which influences the cost of the 5-year fixed rate mortgage. 

The 5-year fixed rate mortgage is traditionally the most popular mortgage product. It’s a common term, meaning it often has the smallest premium compared to the GoC bond yield. Consequently, any changes to the 5-year Government bond yield impacts the housing market, throttling and flooding markets with credit as yields move.

Canada’s 5-Year Government Bond Hits A 5-Year High

The GoC 5-year government bond yield continues to surge. It climbed over 10 basis points (bps) over the past 5 trading days to close at 4.009% on Thursday. The yield is about 129 points higher than last year, and the highest since November 2007. 

“This important yield has rocketed up by more than 100 bps just since early May, with the BoC kicking back into tightening gear, and the economic news generally stronger than expected,” said Douglas Porter, Chief Economist at BMO.  

In a research note, Porter warned investors that this will throttle home sales. “The back-up in five-year yields, along with recent BoC rate hikes, will throw a wet blanket on the nascent recovery in home sales and prices,” he said. 

Source: BMO Economics. 

In addition, higher yields are traditionally correlated with real wage growth. “At 4%, yields are positive in real terms even versus average weekly earnings (3.6% y/y in May)—which tend to erratically track long-term rates,” he further explained. 

Oh no, lower home prices and higher wages. Surely, a tragedy in the making. 

5 Comments

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  • Frank 10 months ago

    We have the trustworthy and reputable BOC Tiff Macklem assured rates would remain low for an extended period. Then pulled the rug on ppl who have saved for years . Bonuses should not be paid arlt all starting to the lower end $11,200 per employee, Tiff millions. Disgusting, vile, hateful and Grinch.

  • Eli 10 months ago

    What is meant by the last line “Oh no, lower home prices and higher wages. Surely, a tragedy in the making.”

    • Patiently Waiting 10 months ago

      The author is being sarcastic. There has been a focus by this government to increase home prices as if it’s a solution. In the meantime, wages have stayed stagnate with little growth. Lower home prices and higher wages are needed if we are to get ourselves out of this housing crisis. Life is expensive and if this government doesn’t understand that.

  • Andrew 10 months ago

    Correction – it will now “slow” home prices, it will cause them to fall.

  • Henry Laverne 10 months ago

    Salaries might trend up, and housing prices might go down? Oh jeeze call the Prime Minister’s Office. We need another two million temporary foreign workers by next month! Better show those young families not to get hopeful and uppity in this country.

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