Rise in bond yields could send fixed mortgage rates higher, experts say

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This week’s rise in bond yields could cause some lenders to reverse recent fixed mortgage rate cuts, experts say.

Since falling to a low of 3.17% in December, the Government of Canada 5-year bond yield has surged nearly 40 basis points, or 0.40%.

Since bond yields typically lead fixed mortgage rate pricing, observers say the recent upswing in yields could put an end to lender rate cuts that have been taking place over the past several weeks, as we reported on previously.

“[Fixed] rates will definitely stop dropping,” Ron Butler of Butler Mortgage told CMT. He noted that there have already been some rate reversals, with certain lenders hiking both uninsured and insured mortgage rates.

Even if some rates rise in the near term, Butler says the larger trend will ultimately be downward over time.

“Eventually all  mortgage rates in Canada will fall, it just won’t be linear,” he said. “There will be a lot of bumps until we finally get to having every rate in the 4% range. There will be a lot of ups and downs.”

Another rate-watcher, mortgage broker Ryan Sims of TMG The Mortgage Group, believes fixed mortgage rates could trend upward if bond yields hold at their current levels.

“I think if rates even hold these levels, banks will start raising a bit here and there into next week,” he said. “Nothing major, as there is a lot of spread now, but a bit around the edges to better reflect the [rise in yields] over the last two weeks.”

Why are bond yields rising?

Some point to the recent rise in Canadian inflation as contributing to the recent rise in yields, as the implication could mean a delay in anticipated Bank of Canada rate cuts this year, resulting in a higher-for-longer rate environment.

But pin-pointing the exact impetus isn’t so easy.

“Are Canadian rates rising because of economic growth, etc. (good news), or are Canadian bond yields rising because investors see more risk in investing in Canada (bad news) and are therefore demanding a higher premium to hold government debt?” Sims questioned. “Rising yields are not always a sign of good things ahead.”

Bruno Valko, Vice President of national sales at RMG Mortgages, noted in a client email that Canadian bond yields are tied very closely to the movements of yields in the U.S. “As yields go in the US, so do they in Canada,” he wrote.

And with sharply lower-than-expected jobless claims reported south of the border today—the latest in a string of better-than-expected data reports—markets are having to re-think their expected timing of both Federal Reserve and Bank of Canada pivots from rate hikes to rate cuts.

“Note the United States employment numbers, payroll numbers, retail sales numbers and initial jobless claims—all came in better than consensus,” Valko added. “This is deemed inflationary and yields rise as a result.”

Butler added that similar forces are behind bond yield movements in Canada. “Bad CPI inflation (i.e., not coming down) reports and good jobs and GDP reports create higher bond yields just as night follows day,” he said.

What should mortgage shoppers do?

With the prospect of mortgage rates possibly rising in the coming weeks, or at least holding at current levels, what do the experts recommend for today’s rate shoppers?

Sims told CMT he’s been busy securing rate holds for his clients since last week.

For those who are already in the midst of a purchase, Butler also recommends that clients get rate holds at today’s rates.

“But if you are just starting to think about buying, rates will be lower in four months,” he added.

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