Mortgage Rates and both Canadian & US Bond Yields
November 11, 2023
Explore how U.S. Treasury Auctions and bond yields affect Canadian 5-year mortgage rates, amidst recent financial shifts and market reactions.

Mortgage Rates and both Canadian & US Bond Yields

In the last few weeks, there have been significant developments in the U.S. financial market, especially concerning the U.S. Treasury Auction, which have wider implications on global financial markets, including Canada’s. This article aims to explain the connection between U.S. 10-year bond yields and Canadian 5-year bond yields, and how these ultimately affect Canadian fixed-rate mortgage pricing, particularly the 5-year fixed rates.

The U.S. Treasury Auction and Its Impact

Last week, the U.S. Treasury Auction experienced unusually weak demand. This led to a drop in bond prices and a corresponding increase in yields. When fewer people or organizations want to buy the bond, then the bond seller, in this case the US Government, needs to increase the payout to the investor to entice them to purchase the bonds.

Additionally, Moody’s downgraded U.S. debt, and it was reported that the interest on U.S. debt has reached a staggering $1 trillion per year. These events indicate a heightened risk perception among investors and a more expensive debt servicing scenario for the U.S. government.

Cost of US Debt Surges Calgary Mortgage Broker

U.S. Debt and Bond Yields

The U.S. government’s debt currently exceeds $33 trillion, with the interest cost alone on this debt amounting to $1 trillion per year. That is about a 3% interest rate on the debt. Such a high level of debt necessitates higher yields on Treasury securities to attract investors because with more debt, then there is a higher risk of the US Government defaulting on (not paying) it’s debt. This is especially relevant given the recent downgrades by Fitch and Moody’s, which reflect concerns about the U.S. government’s ability to manage its debt sustainably.

Canada vs US Bond Yields Calgary Mortgage Broker
source: https://tradingeconomics.com/united-states/government-bond-yield

How Does This Affect Canada?

The U.S. 10 Year Treasury Yields and the 5 Year Government of Canada Bond Yields often move in tandem. This is because global financial markets are interconnected, and major economies like the U.S. have a significant influence on others. The higher yields in the U.S. make Canadian bonds less attractive unless they offer comparable returns. Hence, when U.S. yields rise, Canadian yields tend to follow suit to remain competitive.

Canadian Mortgage Rates

The 5-year fixed mortgage rates in Canada are closely linked to the 5-year Government of Canada bond yields. As the yields on these bonds increase, so does the cost of borrowing for Canadian financial institutions. These institutions, in turn, pass on this increased cost to consumers in the form of higher mortgage rates.

Recent Trends

Following the weak demand in the U.S. Treasury Auction, there was a noticeable increase in both U.S. 10-year treasury yields and Canadian 5-year bond yields.

This is indicative of a market adjusting to the perceived higher risk and lower demand for U.S. debt. The rise in Canadian bond yields can directly translate into more expensive 5-year fixed mortgage rates for Canadians.

EDIT: As of early morning trading November 14th, the increase in the Canadian 5-year bond yield had plummeted back to where it hit a recent bottom on November 3, 2023 thus erasing any increases of the last week. This may stop any increase to fixed interest rates. This is likely tied to lower than expected US inflation data released November 14, 2023

Bond Vigilantes

The concept of ‘bond vigilantes’, who drive bond prices down and yields up in reaction to fiscal policies, has resurfaced. Their actions can significantly influence bond markets, affecting both US and Canadian yields.

Conclusion

The financial relationship between the US and Canada is evident in how US 10-year bond yields directly impact Canadian 5-year bond yields, subsequently influencing mortgage rates. Recent events in the US bond market, such as rising debt interest, credit downgrades, and weak demand at auctions, have exacerbated this impact. It’s crucial for those in the Canadian mortgage market to keep a close eye

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