Introduction
After a brief period of relief, Canadian homeowners are once again facing rising fixed mortgage rates. Most five-year fixed mortgage rates at major Canadian banks have surpassed the 4% threshold, reversing the downward trend observed just two months prior. This resurgence is largely attributed to global economic factors, particularly developments in the U.S. bond market, which have a significant influence on Canadian mortgage rates.
The Bond Market's Influence on Mortgage Rates
Canadian fixed mortgage rates are closely linked to the country's five-year government bond yields. These yields, in turn, are heavily influenced by the U.S. 10-year Treasury yields. When U.S. Treasury yields rise, Canadian bond yields typically follow suit, leading to higher fixed mortgage rates domestically.
In early April, the U.S. 10-year Treasury yield dipped below 4%, causing a temporary decline in Canadian bond yields and mortgage rates. However, recent weeks have seen the U.S. yield climb above 4.5%, prompting Canada's five-year bond yield to rise from approximately 2.50% to 2.85%. Consequently, fixed mortgage rates have increased in tandem.Bank Responses to Rising Yields
CIBC and RBC: Both institutions have raised their five-year fixed rates by about 10 basis points, affecting both high-ratio and conventional mortgages.
TD Bank: TD has increased select mortgage terms, including a 10 basis point hike on its three-year rate and a 15 basis point increase on its five-year fixed rates.
Scotiabank: Contrary to the trend, Scotiabank has reduced several of its posted special rates and eHome digital rates, with cuts up to 90 basis points on its one-year term and 60 basis points on the two-year eHome rate.
Factors Driving the U.S. Treasury Yield
Several elements are contributing to the rise in U.S. Treasury yields, which in turn affect Canadian mortgage rates:
Inflation Trends: Recent reports indicate a cooling of inflation in the U.S., leading to speculation about potential rate cuts by the Federal Reserve later this year.
Investor Confidence: Concerns about economic stagnation combined with inflation—known as stagflation—are influencing investor behavior. Such fears can lead to higher yields as investors demand greater returns for perceived increased risk.
Foreign Investment Shifts: Speculation suggests that foreign countries may be reducing their purchases of U.S. Treasuries, possibly shifting investments to assets like gold. A decrease in demand for Treasuries can lead to higher yields as the U.S. government must offer more attractive rates to entice buyers.
Implications for Canadian Homeowners
The increase in fixed mortgage rates has several implications:
Higher Borrowing Costs: Home buyers and those renewing mortgages will face increased monthly payments, potentially impacting affordability.
Market Dynamics: Rising rates may cool housing market activity as potential buyers reassess affordability, leading to a potential slowdown in home price growth.
Financial Planning: Homeowners may need to adjust their financial strategies to accommodate higher mortgage payments, emphasizing the importance of budgeting and financial planning.
Conclusion
The recent rise in Canadian fixed mortgage rates underscores the interconnectedness of global financial markets. While domestic economic conditions play a role, developments in the U.S. bond market significantly influence Canadian mortgage rates. Homeowners and prospective buyers should stay informed about these trends and consider consulting financial professionals to navigate the evolving landscape.
