Nine European countries saw their S&P credit ratings chopped yesterday. Among them, France and Austria lost their coveted “AAA” and Italy and Spain’s ratings sank two notches to BBB+ and A respectively.

While somewhat expected, this move undermines EU confidence and raises borrowing costs for some countries that barely make ends meet now.

By comparison, Canada’s AAA bonds (which impact our mortgage rates) look more appealing to investors. Barring offsetting news, downgrades in Europe should push our yields lower next week, some traders think.

Lower yields normally mean lower fixed mortgage rates. Unfortunately, that linkage is now less reliable due to widening credit spreads on riskier borrowing. (Mortgages are deemed riskier than government bonds, even if insured.)

We spoke with a capital markets expert at a major bank on Friday. He advises mortgage shoppers not to get their hopes up if yields fall in response to European turmoil.

“I suspect that you are not likely to see any real pass-through (to mortgage rates),” he said. “(Every lender) is looking at the reality of Basel III, liquidity, and the potential additional capital charges.”

Moreover, as the Bank of Canada warns: “An adverse outcome for Europe would also raise the risk of a significant impairment of funding conditions for Canadian institutions.”

For the time being, however, there’s still enough margin left in mortgages to see a smidge more discounting. But don’t rely on mortgage rates falling considerably in the near-term.

Yield Update: Canada’s benchmark 5-year gov’t yield closed Friday at 1.26%, a scant 11 bps above the all-time low.

Rob McLister, CMT

Last modified: April 29, 2014