Canadian Mortgage Rates Hinge on the Americans

Canadian-US-mortgagesIf you want to know what’s moving Canadian mortgage rates, watch the American news.

The reason? Canadian bonds are 95% correlated with American bonds (Treasuries) and bond yields are 97% correlated with 5-year fixed mortgage rates. (See: Yields and Fixed Mortgage Rates)

In other words, Canadian rates are married to U.S. rates. So it’s no wonder that our mortgage rates are being shifted by things like the U.S. debt ceiling and fiscal cliff.

Below is a list of factors weighing on mortgage rates right now:

Rates are in a tug of war between bullish factors (those lifting yields) and bearish factors (those depressing yields). Here’s a current summary of each:

Bullish factors for rates

  • Cliff relief: The U.S. dodged a full-scale swan dive off the “fiscal cliff.” As a result, relieved traders have been selling “safe” bonds and rotating into riskier assets. There may be more of that to come, especially if debt ceiling talks progress better than expected.
  • spring-marketSpring Market: Bond and real estate seasonality are sometimes underestimated. As the prime homebuying season approaches, fixed-rate mortgage demand could help support yields.

Bearish factors for rates

  • A U.S. Econoflop: Congress’s new tax increases are growth and job killers. And, the wasted opportunity to cut spending means future U.S. “austerity” measures could be more severe.
  • Debt Ceiling: In a few months, Congress will face its next big decision: raise the debt ceiling for the 41st time in 30 years, or let the U.S. default. The latter isn’t likely but the thought of it could perpetuate the safe-haven trade (i.e. keep people from dumping bonds and driving up yields).
  • Euro-risk: Europe’s three years of debt turmoil has been upstaged, but not eliminated. European central bank liquidity is a Band-Aid solution and Spain and Greece are in depression.

Wildcards for rates

  • Rating agencies: The New Year’s fiscal cliff compromise cut just $12 billion in U.S. spending, while adding $4 trillion of new debt. Credit rating agencies must be shaking their heads. Without budgetary tightening by spring, another downgrade is not unthinkable. Losing another AAA rating would either seriously damage the Treasury’s “risk free” reputation and spike yields, or compel investors to buy U.S. Treasuries in knee-jerk fashion (like in August 2011).
  • Lift-Off-for-Bond-YieldsU.S. and/or Canadian Outperformance: Most traders expect low rates to stick around. But if employment improves significantly and traders sense that the Fed is abandoning its commitment to hold down rates, all bets are off. The historic Treasuries rally will unwind and yields will lift-off.

At the moment, there is maximum uncertainty. While nobody expects major rate increases near-term, a 20-30 basis point increase would shock no one.

So if you need a mortgage in the next six months, don’t hesitate to lock in at today’s epic low rates.


Rob McLister, CMT

  1. Rob I usually like what you have to say, but I have to disagree with you here, at least partially. I don’t believe that the financial consequences were fully put off by the U.S. “avoiding” the fiscal cliff. What really happened was that they did avoid that full swan dive, as you had mentioned, but what happened instead was that they were caught by a branch about a quarter of the way down the cliff. They’re still in trouble, just not as much as they were early New Year’s Eve.
    Also, investors and traders are going to be holding tightly to what they have and not buying anymore or being all that active. I believe a decision on the debt ceiling needs to be reached in weeks, not months, and that along with all the other uncertainty has been making people – both Canadians and Americans – very nervous. I don’t disagree that what happens over there is bound to have an effect on us over here. I just think we have different views on what’s happening down there. Thanks for sharing yours!

  2. Hi Bryan,
    Well, “usually” agreeing is better than 50% of the time; so thank you for that. ;)
    I think we agree more than meets the eye on this one. Without a doubt, and to paraphrase your 2nd sentence, fiscal risk was not fully “avoided” by Tuesday’s deal — hence the article’s references to a potential economic flop, debt downgrade, debt ceiling risk, etc.
    Regarding what investors do from here, your crystal ball seems clearly better than mine. :)
    All the best…

  3. Hi Davy,
    The 39,800 new jobs were another upside surprise. This momentum adds to gains of 52k and 59k in Sept. and Nov. (20-24k has been the rough average.)
    It shouldn’t take many more blockbuster employment reports to reignite rate hike conversations–assuming no disasters in the next act of U.S. budget drama.
    Mind you, even if the U.S. successfully deals with its debt situation, some will point to Canada’s core inflation at 1.2% and say rate hike speculation is ridiculous. But that may be overly dovish. The Bank of Canada sets policy on what it thinks inflation will be 1-2 years from now, not on the CPI today.
    Cheers…

  4. haha, this is all assuming you want low rates. You don’t. It causes a housing bubble. So switch your words bullish and bearish and you have it correct.

  5. @Bryan Jaskolka
    I can’t help but ask. How would you possibly know this:
    “investors and traders are going to be holding tightly to what they have and not buying anymore or being all that active”

  6. I am sticking with my 2.35% variable until the end of its 5 year term. I don’t see interest rates rising much at all for the foreseeable future. Federal and personal debt loads are killers right now and no one can afford an interest rate hike on both sides of the border.

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