Canadian bond yields are on the rise, and a big bank has forecast it will take mortgages along for the ride as well. The latest research note from BMO focuses on climbing longer term bond yields. The bank sees this as just the beginning, and sees modest growth for the next two years. They also expect rising yields to drive mortgage rates higher along with it.
Canadian Bond Yields Are Soaring, Meaning Higher Mortgage Rates Are Coming
Global bond yields are climbing, and it’ll push mortgage rates higher if this continues. The Government of Canada (GoC) 5-year bond yield is now 1.096% today, up 26.25 basis points (bps) from a month before. Around a third higher than a month ago is quite the boom, driven by global central banks making hawkish statements last week.
Since debt products compete with each other, rising bond yields take mortgage rates with them. The GoC 5-year strongly influences the 5-year fixed mortgage rate. “With the upward pressure in longer-term bond yields renewing itself, the risk that 5-year fixed mortgage rates could move higher is mounting,” said Robert Kavcic, a senior economist with BMO.
Adding, “recall that this was also the case in early-2021 and, after fixed rates began to creep up, the pullback in bond-market interest rates stopped the move.”
Canadian Bond Yields Forecast To Rise Further
Unlike earlier this year, the rise in bond yields isn’t thought to be a blip this time. The recovery is well underway, and more importantly inflation is rising and looking less transitory by the day. BMO sees these factors pushing the 5-year GoC yields up 40 bps in 2022, followed by another 30 bps from the year before. That’s pretty much double the rate seen about a month ago.
Even though yields would still be low (lower than inflation, certainly), it’s enough to push mortgage rates higher. “That’s not a game changer, but enough to pressure fixed rates gradually higher and out of the sub-2% range,” he said.
This Is Probably The Ideal Time To Lock In Your Mortgage Rates
There are a lot of factors to consider when locking in mortgage rates. If you’re buying, the impact of rising rates are something to consider. People renewing might now find a better time to renew, pending Canada doesn’t pull a double-dip recession.
“Should I lock in? The age-old question is ultimately a personal finance issue, but it’s just about the right stage of the cycle to do so,” said Kavcic. “That is, while longer-term yields are still (relatively) low, and before the BoC begins to raise rates—the latter is likely a 2022 H2 story.”
Mortgage rates will still be low, and possibly lower than inflation for a while. They just won’t be this low for much longer, unless Canada falls into another recession soon. Economists have been calling rising rates for the past few months, warning the longer it takes the more sudden the increase will be. Climbing bond yields seemed unlikely until last week, which even left some banks scrambling to correct their assessment.
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