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(Oct 3, 2023)

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Since September 14th, Canada’s 5-year bond yield has increased from 3.96% to 4.30%. What does this imply? Bond yields have a direct correlation with fixed mortgage rates, meaning that when yields rise (as they are presently), mortgage rates also increase. The same holds true in reverse. When widespread bond sell-offs occur (as they are now), their prevailing yields increase.

Why are bond yields increasing?

There are a few reasons why bond yields increase:

Widespread bond sell-offs happen when bond investors anticipate rising interest rates…these higher interest rates result in lower bond prices (higher yields) which trigger bond holders to sell in order to avoid capital losses.
Changing economic conditions also contribute to widespread bond sell-offs. If investors believe the economy is improving and becoming less reliant on accommodative monetary policies (such as low-interest rates), they may sell bonds and move into other assets they perceive as offering better returns or growth potential, such as stocks.
Rising inflation expectations can trigger a bond sell-off. When investors anticipate higher inflation, the fixed interest payments from bonds may become less attractive in real terms. To protect their purchasing power, investors may reduce bond holdings.
Central bank policies play a significant role in the bond market. If central banks signal a shift toward tighter monetary policy (e.g., raising interest rates or reducing bond purchases), it can lead to a bond sell-off as investors adjust their portfolios in anticipation of these changes
Periods of increased market volatility can lead to bond sell-offs as investors seek to reduce risk and seek shelter in more stable assets. This can be particularly true during financial crises or significant economic uncertainties.

The Bottom Line:

Bond yields affect mortgage rates. The market is extremely volatile and as a result, isn’t reported on a daily basis in great detail (it is, but only financial nerds follow it…it certainly isn’t a fun/interesting story line for general public news/media consumption). While most people are focused on the Bank of Canada’s recent (September 6) or upcoming (October 25) interest rate announcements, the bond market is rapidly establishing new benchmarks for fixed mortgage rates. It’s fast, confusing and occurs in real time, hence, the media’s hesitation to provide made-for-general-public news blasts on it as the reporting for the day can quickly become old news within an hour of its release.

If this current pattern persists over the next few days, expect fixed rates to increase by another 0.15%-0.20%. My bet is that It’s quite likely that rates will begin another upward trajectory by the end of this week.

What should I do?

If you are refinancing/renewing: start your mortgage renewal inquiry as early as 6 months prior to your maturity date. During the initial two months, we’ll work on updating your application profile and getting it ready for the competitive marketplace of lenders. Once we reach the 4-month rate hold window, your application will be primed and ready. At this stage, we’ll pitch your application to multiple lenders, putting you in the spotlight where they’ll vie for your business. The last thing you want to do as you approach your renewal is nothing. Reach out to me via email or phone to kick-start your mortgage renewal process today.

If you are purchasing: analyze your finances and cash flow to see if buying in the current environment is feasible. While you may not be thrilled with today’s interest rates, keep in mind that you will likely renew at a rate in the future that could be 20%-40% lower. However, the same cannot be said for the real estate market…I don’t see property values plummeting 20-40%. Buying in today’s environment is not stupid and unwise, you simply need to proceed with tact and strategy.

If you are renewing, refinancing or acquiring a property in the next 6 months, call me right now to secure your rate hold. Call or text Marko Gelo right now at 604-800-9593, or Click Here to schedule a free, no-obligation phone call with Marko.

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