What's going on with mortgage rates?
Many people don't realize that there is a very strong correlation between fixed mortgage rates and the Government of Canada bond yields. Bond yields change daily and so can fixed mortgage rates. Many things affect mortgage rates but the single biggest item is Government of Canada bond yields. Government bonds are 100% guaranteed to be repaid, but mortgages are not; therefore mortgages carry more risk of default or early repayment, which could potentially disturb the return on the investment. Therefore, mortgage rates must be priced higher to compensate for that risk.
Bond yields are a measure of the profit you will make from your bond investment. The less you pay for a bond, the greater your profit will be and the higher your yield will be. Conversely, the more you pay for a bond, the smaller your profit will be and the lower your yield will be.
Bond prices and bond yields have an inverse correlation. When bond prices are going up, bond yields are going down. Now, the only reason bond prices go up is if there is an increase in demand for the bonds. When bond prices are going down, bond yields are going up. Now, the only reason bond prices go down is if there is a decrease in demand for the bonds. Typically, you will see a decrease in demand for bonds when bond investors feel their money would better serve them if it was invested in the stock market because the stock market is, or is about to, go up. This can actually weaken the dollar.
Bond yields are a good indicator of how strong the stock market is and how much interest there is in the Canadian Dollar. Typically, you will see an increase in demand for bonds when stock investors are concerned about the safety of their stock investments and they decide to seek more safety for their money by investing in bonds and other government backed investments. This will usually cause the Canadian Dollar to rise against the majors.
Why Should You Care?
You may be thinking to yourself, “I’m not a bond investor. Why should I care what bond yields are doing?” The reason why Government bonds are important is because bond yields often have a direct impact on the direction of fixed mortgage pricing. Just recently, Canada’s 5-year bond yield reached a 3-month high. The expectation of most mortgage brokers is that the impact of these higher bond yields will also result in increased fixed mortgage rates. The impact is already being felt as several mortgage lenders have already raised their fixed mortgage rates. Government of Canada 5 year bond yield has increased by 33 basis points in less than a month and is used by the mortgage industry as the pricing benchmark for determining fixed mortgage rates.