Lots of people know that bond yields influence fixed mortgage rates. But not so many know what influences bond yields.
There are actually countless factors and you could never list them all because some are random or can’t be anticipated (like the subprime catastrophe).
That said, the key bond drivers are inflation expectations and the supply/demand for Canadian treasuries. Those things hinge off of global economic performance (especially the performance of the U.S. economy), the risk and returns in other financial markets (like the stock market), the supply of new bonds, the Bank of Canada’s monetary policy, and the strength Canada’s economy.
Canada’s economic performance and inflation outlook are understandably paramount. The common gauges of these things are Canada’s monthly and quarterly economic reports.
“Of course, a key caveat to this list is that Canadian data is never taken in isolation,” says Brecht. “The market tends to track the direction of U.S. Treasures, with spreads adjusting based on the Canadian data and other factors.”
Brecht’s point about the United States’ influence on Canadian rates cannot be understated. Bank of Canada research has found that:
“U.S. macroeconomic announcement surprises explain a substantial part of Canadian interest rate movements.”
That, of course, is because Canada’s fortunes are so tied to our southern neighbour.
In any event, if your goal is to be a bond market prophet, there’s a lot you have to follow.
Unfortunately, there are few on earth who can put all the puzzle pieces together and know where rates will be “x” months down the road…