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Bond yields are back on the rise. Will fixed mortgage rates follow?

Bond yields are back on the rise this week, which observers say could keep upward pressure on fixed mortgage rates if the trend continues.

Bond yields surge in July

Bond yields are back on the rise this week, which observers say could keep upward pressure on fixed mortgage rates if the trend continues.

Bond yields, which typically lead fixed mortgage rate pricing, have surged over 20 basis points—0.20 percentage points—since Friday.

The 5-year Government of Canada bond yield rose to 3.92% on Tuesday, on its way back up to the next resistance level of 4%, observers say.

What’s behind the latest move in bond yields?

There were no major economic data releases or comments from central bank figures that were behind rising yields. However, it could be due to a number of other factors, according to Ryan Sims, a TMG The Mortgage Group broker and former investment banker.

“It could be as simple as a lot of institutional investors selling bonds at these levels, and driving yields up,” he told CMT.

“It could be some big re-balancing by pension funds, hedge funds, mutual funds, etc. It could be a shortage of lending capital, as we know banks are starting to get tight on lending,” he added. “Volumes are also pretty thin, which tends to lead to some price distortions as well.”

Sims notes that the 5-year yield has repeatedly challenged the 4% mark, a “major point of resistance,” and has so far failed to sustainably break through.

“I would think if it cannot decisively clear the 4% mark, then we head lower,” Sims said. “A beautiful head-and-shoulders pattern is now formed, and that is almost always bearish for any asset.”

The impact on fixed mortgage rates

However, should yields break and stay above 4%, it could lead to another round of increases for fixed mortgage rates, which have been climbing steadily since April.

Banks and other mortgage providers continued to increase selected fixed mortgage rates last week, but the pace of the hikes has slowed from previous weeks.

The lowest nationally available deep-discount 5-year fixed mortgage rate is now above 5%, according to data from MortgageLogic.news.

While there are some exceptions for insured and insurable products, 5-year fixed terms are now about the only place mortgage shoppers will find rates with a 5-handle, or those with rates in the 5%-range. Most mortgage providers are now offering shorter-term mortgages (1- to 3-year) with rates in the 6% and 7%-range.

Despite theses elevated levels, rate-watchers say more increases could still be on the way should bond yields continue to push higher.

Ron Butler, of Butler Mortgage, noted that a year ago anyone who suggested 5-year fixed rates would be available in the mid-5% range would have been “escorted out of the building.”

“So, we can’t completely discount the fact rates can go higher,” he told CMT. “I think it can go higher, but eventually we are going to see breakage.”

Butler says it’s only a matter of time before the economy slows, potentially going into recession, which would then take bond yields and fixed rates back down.

“That’s likely going to happen right at the end of this year or in Q1 or Q2 of next year,” he said. “We will not see anything like 2021 rates, but we’ll see rates lower than they are today.”

Affordability issue for borrowers

The run-up in both fixed mortgage rates (due to rising bond yields) and variable mortgage rates (due to Bank of Canada rate increases) have hit borrowers hard.

Ben Rabidoux of Edge Realty Analytics notes that mortgage rates are at levels not seen since 2007, which he says is having a “pronounced impact” on affordability, particularly in the higher-priced markets of Ontario and British Columbia.

“The monthly payment needed to purchase a typical home has surged by 12%, or nearly $400 in just four months,” he wrote in his latest newsletter for subscribers.

As of the first quarter (prior to the last two Bank of Canada rate hikes), interest costs for mortgage borrowers have skyrocketed by nearly 70% year-over-year, according to data from the Bank of Canada.

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Last modified: July 25, 2023

Steve Huebl is a graduate of Ryerson University's School of Journalism and has been with Canadian Mortgage Trends and reporting on the mortgage industry since 2009. His past work experience includes The Toronto Star, The Calgary Herald, the Sarnia Observer and Canadian Economic Press. Born and raised in Toronto, he now calls Montreal home.