The Government of Canada’s 5-year bond yield witnessed a sharp incline, hitting an intraday peak of 4.46%. Although it has since settled to approximately 4.32%, this marked escalation over a fortnight, by over 0.30%, is significant.
Impact on Fixed Mortgage Rates
This upward trend in bond yields is closely mirrored in the realm of fixed mortgage rate pricing. Predictions from industry experts suggest an imminent 20 basis point augmentation by week’s end.
Presently, the only discounted rates below 6% are largely limited to default-insured 5-year fixed mortgages, aimed at those with down payments of less than 20%. Most conventional 5-year fixed mortgages are now priced at 6.5% or even higher, with some notable exceptions for larger down payments.
The scenario is even more daunting for 2-year fixed terms, which hover in the 7% spectrum, while 3-year terms threaten to exceed this benchmark.
The Role of “Higher-For-Longer” Rate Expectations
The primary catalyst for the recent yield surge is the market’s recalibration around the “higher-for-longer” interest rate expectation. Paired with the prevailing sentiment that Canada will stave off a severe recession, the bond market is reacting swiftly.
The climbing interest rates on newly minted bonds have relegated older, lower-rate bonds to the shadows. The inevitable price reduction on these older bonds makes them viable for prospective investors. When yields ( interest rates ) are up, then the price of the bond is down.”
Comparatively lower bond values pose a significant concern, especially for predominant bondholders like Canada’s banking giants. With plummeting bond prices, banks must allocate more capital as a buffer against these reductions. This, in turn, escalates the margin on the funds they allocate for new mortgages, creating a cyclical impact.
The 8% Fixed Mortgage Rate – A Potential Reality?
While still in the realm of speculation, it’s not entirely far-fetched to envision a 5-year uninsured mortgage rate touching the 8% mark. The continuous surge in the Government of Canada’s 5-year bond yield paves the way for this potential outcome.
Interestingly, today’s mortgage borrowers, and those transitioning between lenders, are already grappling with these hypothetical rates due to the mortgage stress test. This measure qualifies them at rates that exceed their contract rate by 200 percentage points.
Renewal Woes Loom Large
The Bank of Canada acknowledges that over one-third of mortgage account holders are already reeling under the strain of surging interest rates. By 2026, this will be a universal experience.
While variable-rate borrowers have been the immediate casualties of these escalating rates, the net is widening. Approximately 1.2 million mortgage renewals annually signify that fixed-rate mortgage holders are not far behind in this upward rate trajectory.
Canada’s bond market upheaval and its subsequent impact on fixed mortgage rates underline the interconnected nature of global finance. As mortgage holders brace for potentially steeper costs, the Canadian housing market navigates uncharted waters. However, as with all financial cycles, time will be the ultimate determinant of market stabilization and potential recovery.