Canada’s fast-rising bond yields just hit hyperdrive and they’re now rising even faster. Government of Canada (GoC) bond yields surged across the board on Tuesday. The move will drive mortgage costs higher, especially 5 year fixed rates with the corresponding government bond hitting the highest rates since 2007. There’s just one issue—back then, the rate was only this high for just a few weeks. Today borrowers may not be so lucky, as central banks tell the market to prepare for rates to go higher for longer. A similar level hasn’t been maintained for a significant period of time in roughly 20 years.
Canadian 5 Year Bond Yield Growth Is Accelerating, Not Slowing Down
Canada’s GoC 5-year bond yield ripped higher today, touching a multi-year high. The yield reached 4.458% in this morning’s trade, before pulling back but retaining significant gains. It’s being discussed as a 52-week high, and the highest level since 2007. That’s missing a bit of context, but we’ll circle back to that point. First, let’s touch on how fast the recent move has been.
Canadian Government Bond Yield (5 Year)
The Government of Canada (GoC) 5 year bond yield, in percentage points.
Source: Bank of Canada; Better Canada.
Virtually everyone knows the 5-year yield has ripped higher over the past year. The increases over the past 5 days represent nearly 1 in 8 basis points the rate has increased over that year. Just five of the past 365 days did an eighth of the total increase. It was also so recent, not even Stats Can has logged the trading period yet.
The Highest Rate Since 2007, But This Time It May Last Longer
A lot of media attention focused on the yield hitting the highest level since 2007. That’s true and it was a long time ago, so the market will have a lot of adjustment pains. However, back in 2007, rates were only briefly around this level, limiting the impact.
Rates were last higher than the current level in 2007, for fewer than 3 months (80 days to be exact). It wasn’t normal, so it wouldn’t have had a big impact on the market. A year before, the 5 year bond yield only climbed above today’s level for 14 days. Odds of being one of the borrowers at this level was slim back then.
Finding a period where this level was normal requires going back to 2002-2003. We need to go to a period before unconventional policy becomes common. Is it still unconventional if it’s now used before the impact of conventional policy is seen?
Canadians Should Brace For Rates To Stay Higher For Longer, Driven By Global Factors
Bond yields impact mortgages of similar terms, so a 5 year bond only impacts the 5 year fixed rate mortgage. Rates are rising across the board though, so expect it to be a broad issue. The gap is getting close between the 1 (5.31%) and 5 (4.58%) year bond yields. They’re also close to the overnight rate (5.0%), impacting variable rate mortgages. Unlike earlier this year when the BoC paused rates, the discount gap is very small.
The overnight rate and yields this high was almost inconceivable a few months ago. A dramatic change to the outlook occurred due to sticky inflation and global shifts. A robust market, strong wage growth, and booming population are all inflationary. People keep calling a weak economy but it’s hard to see that call at a macro level.
Less often discussed has been the fading international demand for bonds in Canada and the US. After the Global Financial Crisis (GFC), the world sought these as a flight to stability. Now with elevated inflation and higher domestic yields overseas, the shift is reversing. Canada and the US now have much more competition for a place to park money. Rising geopolitical tensions forcing institutions to diversify isn’t helping either.
Simply put, an excess of capital found itself in Canada and the US post-GFC, pushing rates down. Now that global competition has increased, the capital is being allocated more broadly. It’s not just Canada’s cheap debt finding a new home abroad. That was also the cheap cash providing cheap mortgages.
It’s unclear what kind of timeline “longer” is. BMO recently trimmed the number of rate cuts expected, with inflation looking stickier. They are still forecasting rate cuts at this point though, it just won’t be as cheap as pre-2020.