The global bond market is in turmoil, and Canadian mortgage borrowers are feeling the heat. As long-term Canadian government bond yields soar to their highest levels in over 16 years, the specter of rising mortgage rates looms large. This surge in bond yields is a result of a global bond sell-off, driven by concerns over inflation and geopolitical uncertainty, particularly the war in Iran. While Statistics Canada's inflation data released on Tuesday suggested that Canadians have been somewhat insulated from rising prices, the impact on mortgage rates is already being felt.
The five-year Government of Canada bond yield, a key indicator for mortgage rates, rose to its highest level in nearly 22 months before recovering to trade flat from Friday's close. This is a significant development, as it directly affects the cost of borrowing for Canadians, especially those with variable-rate mortgages. Royce Mendes, head of macro strategy at Desjardins, highlights the global nature of this phenomenon, noting that domestic economic data has not been sufficient to pull yields down.
Mendes' base case is that five-year yields will eventually come down, but the current global environment makes it challenging to predict with confidence. Lorne Gavsie, head of macroeconomic and foreign exchange strategy at CI Global Asset Management, adds that the Bank of Canada faces a delicate balance in navigating an uncertain macroeconomic and geopolitical landscape. The bank's ability to manage demand-side policies, such as those aimed at controlling fuel prices, is limited compared to supply-side shocks like the Middle East conflict.
The impact on the housing market is already evident. The Teranet-National Bank House Price Index fell for a fifth consecutive month in April, indicating a weak housing market. Daren King, senior economist at National Bank Capital Markets, points out that affordability challenges are weighing on property prices, with the largest declines recorded in the least affordable markets. Higher mortgage rates, lifted by rising bond yields, are further exacerbating the situation, as illustrated by the pass-through from the five-year government bond yield to the five-year fixed-rate mortgage.
Ron Butler, principal broker at Butler Mortgage, warns that further increases in the five-year yield could significantly dampen the housing market. He notes that mortgage rates have already risen from 3.79% at the end of February to 4.49% by the end of March, and a move to 5% or higher would be a significant burden for many borrowers. The prospect of mortgage rates approaching 5% is a real concern, as it would make borrowing costs prohibitively high for many Canadians.
In conclusion, the surge in global bond yields is a critical issue for Canadian mortgage borrowers. While the Bank of Canada and other economic indicators provide some insulation from rising prices, the direct impact on mortgage rates is already being felt. As the global bond market continues to fluctuate, Canadians must carefully consider their borrowing strategies and the potential implications for their housing market.
