While fixed rates seem likely to go up in the short-term, home buyers locking in rates now should ask lenders what will happen if rates fall before they move in.
When the Bank of Canada (BoC) met on September 4, the Government of Canada (GoC) five-year bond yield stood at 1.12%, which marked a 52-week low.
At the end of that meeting the Bank surprised market watchers when it released a more bullish than expected policy statement, and since then, our bond yields have moved steadily higher. To wit, the five-year GoC bond yield closed at 1.51% last Friday after its sharpest five-day increase in well over a year.
While on first pass the cause and effect of our recent bond-yield surge may seem clear, a closer look suggests otherwise.
Consider that on September 4, the five-year U.S. treasury bond yield stood at 1.30%, which was also a 52-week low. By close of business last Friday, it had surged even higher than its GoC equivalent, closing at 1.75%.
In case anyone needs reminding, GoC bond-yield movements are highly correlated with U.S. bond yield movements, and with that in mind, our recent spike likely has more to do with changes in the U.S. outlook than with the stubbornly hawkish BoC.
Here is a summary of recent developments south of the border, along with my take on how material they will ultimately prove to be:
The U.S. economy impacts ours more than any other, but every country is also affected by global economic momentum. To that end, there are still more than $15 trillion USD worth of global bonds trading at negative yields. Last week, European Central Bank (ECB) President Mario Draghi cut the ECB’s policy rate to a record low of -0.50% and pledged that it would remain there until the Bank has seen inflation “robustly converge” towards its 2% target. The ECB also pledged to continue its bond purchase program (which drives down euro zone yields) “for as long as necessary to reinforce the accommodative impact of its policy rates.”
All of that will exert downward pressure on the yields of safe-haven bond yields that still have positive rates (U.S. and Canadian alike). As will any geopolitical flare up, especially at a time when there are many to choose from. (The attack on critical oil facilities in Saudi Arabia provides the latest example.)
What does all of this mean for fixed-rate mortgage borrowers?
Interestingly, most Canadian lenders haven’t moved their fixed mortgage rates higher as yet.
That’s surprising because our fixed mortgage rates typically take the elevator when they rise and the stairs when they fall (and a 0.39% spike in the five-year GOC bond yield would normally be more than enough reason to raise).
The delay may be in part because gross lending spreads were wider than normal before the recent bond yield run-up began, giving lenders more buffer to work with. But I also wonder if they may be betting that yields will fall back down in short order.
(Most lender rate meetings happen on Monday, so their answer may be forthcoming.)
The Bottom Line: The recent surge in the five-year GoC bond yield means that five-year fixed mortgage rates will likely increase over the short term. That said, for the reasons outline above, I think that any run-up in yields won’t be sustained. If I’m right, borrowers who need to secure an approval today should check their mortgage contract to confirm whether their lender will lower their rate if it drops in the time between when they are approved and when their deal closes. (Only some will.)
Top image credit: robuart
David Larock is an independent full-time mortgage broker and industry insider who works with Canadian borrowers from coast to coast. David's posts appear on Mondays on this blog, Move Smartly, and on his blog, Integrated Mortgage Planners/blog.