Several rate experts predict this will inevitably lead to higher fixed mortgage rates in the weeks ahead.
As bond yields typically lead fixed mortgage rates, rate shoppers should brace for some rate hikes in the coming week.
“We will see fixed rates edge up,” rate expert Ron Butler told Canadian Mortgage Trends, adding that the ‘Trump effect‘ is still in force and that U.S. 10-year Treasuries—which influence yields on this side of the border—are continuing to track higher.
As we wrote earlier this month, Donald Trump’s recent U.S. presidential victory has triggered a surge in markets, including the bond market, fuelled by his pro-growth policies and tax-cut promises.
Many of Trump’s policies are inflationary, including his promise to remove taxes on tips and overtime, introduce a 60% tariff on Chinese goods, and threaten the deportation of millions of immigrants, which could drive upward pressure on wage growth, says Bruno Valko, VP of national sales for RMG.
“So, there are a lot of inflationary pressures in the United States,” Valko said, which is influencing rate-cut forecasts by the U.S. Federal Reserve.
The futures market is now pricing in about a 38% chance of a Fed pause in December, following Chair Jerome Powell’s comment last week that a strong economy removes the urgency to return policy rates to neutral.
“I think the market is seeing a lot of promise in the U.S. economy over the next few years,” adds rate expert Ryan Sims. “And as goes the U.S. yields, so goes Canadian yields, as has always been the case.”
Canada facing its own inflation battle
Canada is facing its own inflation challenges. In October, the annual headline inflation rate climbed more than expected to 2.0%, up from 1.6% in September. While a small increase was anticipated, the more concerning factor is the “stickiness” of the less volatile core inflation measures, which also saw a rise.
“Inflation has not gone away like central bankers wanted it to,” Sims said, adding that the inflation issue isn’t unique to Canada, but a trend also being seen in the U.S. and UK. “Inflation will not die, and as such, bond yields have to rise to offset the potential for higher-than-we-would-like inflation.”
The federal government’s announcement Thursday that it plans to mail out $250 to nearly 19 million Canadians, as well as a GST/HST holiday on some goods from December to February, is only likely to add to inflationary pressures, some say.
Butler says the government’s plan is “clearly deficit spending, which leads to inflation eventually and is making bond traders scratch their heads over what’s going on in Canada.”
Variable rates to become more popular as the BoC keeps cutting
Butler notes that while fixed mortgage rates may stall or trend higher in the near term, variable rates are expected to fall in the coming months with more anticipated Bank of Canada rate cuts.
As a result, the popularity of variable rates is making a comeback after falling out of favour with mortgage borrowers when rates hit record highs.
“When we look at the composition of new originations, it is very interesting as we’re starting to see a bit of an uptick in variable-rate mortgages,” Ben Rabidoux of Edge Realty Analytics said on a call to subscribers this week.
While 3- and 4-year fixed terms remain the most popular choice for today’s borrowers, Rabidoux expects more to opt for variable rates as the Bank of Canada continues to lower rates.
“If you’ve got risk-tolerant clients, variable still looks really interesting and I think you could see variable really start to pick up,” he added.
Bank of Canada ben rabidoux BoC Bruno Valko edge realty analytics Editor's pick federal reserve fixed mortgage rate forecast fixed mortgage rates inflation interest rate forecast interest rates ron butler ryan sims variable rate mortgages variable rates
Last modified: November 22, 2024
