While the Bank of Canada (BoC) recently cut interest rates, the bond market tells a different story. Government of Canada (GoC) bond yields have reversed their course, surging upward and signaling higher costs for fixed-rate mortgages. For Canadian homebuyers, this is an important shift as fixed-rate mortgages—historically the most affordable option—could soon become more expensive.
Those waiting for further rate cuts may face disappointment as bond yields surge, counteracting the central bank’s easing.
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Government Bond Yields Surge Following BoC Rate Cuts
The 5-year GoC bond yield—a critical benchmark for mortgage rates—is climbing sharply. Since Wednesday’s BoC rate cut, yields have surged:
- 19 basis points (bps) since Wednesday morning.
- 30 basis points over the past 3 months.
As of midday today, the GoC 5-year bond yield hit 2.97%, up 4 bps since opening. This upward trend directly impacts the cost of fixed-rate mortgage financing.
How Much Could It Cost Homebuyers?
While a 19 bps increase might seem minor, it has tangible financial consequences. If fully reflected in mortgage rates, it could:
- Reduce maximum leverage by 1.9%.
- Result in 4.7% more interest paid over a 5-year term.
For perspective, a household earning $100,000 annually would essentially need to work an extra month to pay for this 3-day bond market shift.
Fixed-Rate Mortgages Begin to Rise Across Canada
The lowest fixed mortgage rates haven’t fully moved for 5-year terms yet, but shorter-term rates have already started climbing. According to mortgage comparison site WOWA, notable changes include:
- 2-Year Fixed: 4.3% (+20 bps).
- 3-Year Fixed: 4.3% (+5 bps).
- High-Ratio Loans:
- 1-Year: 5.74% (+15 bps).
- 3-Year: 4.19% (+15 bps).
- 4-Year: 4.2% (+1 bps).
The recent surge marks a reversal from last year’s downward trend. Although the GoC 5-year yield is still below the 3.9% peak seen earlier this year, it has climbed 19.4 bps year-to-date (YTD) and 31.26 bps compared to last year.
Why Are Bond Yields Rising? Key Factors Explained
Government bond yields are influenced by two primary drivers:
1. Inflation Expectations
Investors demand higher yields to offset inflation risks. Despite the BoC’s recent rate cut, its hawkish stance on future monetary policy signals that further rate cuts won’t come easily. Additionally, monetary and fiscal stimulus programs could drive inflation higher, adding pressure on yields.
2. Liquidity and Demand
Liquidity—or the balance of supply and demand—plays a crucial role in bond markets. With government spending increasing, borrowing needs rise. This surge in bond issuance requires higher yields to attract investors, particularly when demand remains weak.
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Rising Bond Yields Could Push Mortgage Rates Higher
Despite recent BoC rate cuts, rising Government of Canada bond yields are a warning sign for borrowers. Fixed-rate mortgages, often tied to these bond yields, are already climbing for shorter terms and are likely to rise for 5-year terms soon.
For Canadian homebuyers, the bond market’s upward trend signals that waiting for lower mortgage rates could be a costly gamble.
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