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Lenders cutting fixed mortgage rates

Experts predict lower mortgage rates as bond yields plunge

Mortgage shoppers and those with upcoming renewals may see some rate relief next week thanks to a steep drop in bond yields.

This week alone, the 5-year Government of Canada bond yield slid over 30 basis points to 3.79%. It’s now down more than 60 bps—or 0.60%—from its recent high of 4.42% reached in early October.

Rate watchers say that should translate into some rate relief by next week given that bond yields typically lead fixed mortgage rate pricing. However, don’t expect any rate drops to match the decline in yields.

“The old saying is: [rates take the] elevator on the way up and the stairs on the way down,” Ron Butler of Butler Mortgage told CMT.

“Fixed rates will start to fall next week, likely 20 to 40 bps over the next two weeks, depending on the term,” he added.

Ryan Sims, a TMG The Mortgage Group broker and former investment banker, gave a similar forecast.

“Rates will come down for mortgages, but not nearly as much as they should,” he said. “That’s because lenders and mortgage providers are likely to keep risk premiums baked into their pricing given the potential for an economic downturn in the near term.

“Banks have proven in the past that at the first hint of problems they will not hesitate to raise spreads to cushion the blow,” Sims noted. “We last witnessed this in March of 2020 when interest rates plummeted in a week, and 5-year fixed mortgage rates went up by 30 bps.”

He said a similar scenario played out in 2008 during the Financial Crisis when the spread over bond yields grew from about 200 bps to 325 bps in order to compensate for the added market risk.

Markets are moving up calls for rate cuts

What’s driving this latest plunge in yields? In short, each new release of economic data is pointing to a weakening economy, and growing signs that no further rate hikes are on the horizon by both the Bank of Canada and the Federal Reserve.

In Canada, we’ve seen headline inflation continue to fall, a slowdown in consumer spending, household credit growth and housing activity, and most recently weakening employment data and a rise in the unemployment rate.

This is all having an impact on rate forecasts. Following today’s release of October employment figures, markets went from pricing in a 10% chance of a rate hike at the December 6 Bank of Canada meeting to a 7% chance of a rate cut.

While most big bank forecasts don’t expect the Bank of Canada to begin cutting rates by the middle of 2024, markets are betting a weak economy will force the central bank’s hand a little sooner.

Bond markets are pricing in 83% odds of a quarter-point rate cut by March 2024, and 81% odds of 50 bps worth of cuts by June.

“There is no scenario priced in now that shows any rate hikes at all,” Sims notes. “It looks like it is straight downhill from here, although timing will be the issue.”

Earlier this week, Deputy BoC Governor Carolyn Rogers confirmed the central bank could start cutting interest rates before inflation reaches its target rate of 2%, which is officially expected by mid-2025, according to the Bank’s latest Monetary Policy Report.

While testifying this week before the House of Commons finance committee with BoC Governor Tiff Macklem, Rogers said monetary policy is forward-looking and that “we don’t need to wait until inflation is all the way back to 2%.”

“If we get signs that we can be confident that inflation is coming down and will remain down, then we would start thinking about lowering interest rates, but we’re just not there yet,” she said.