The blinkers are flashing red for future mortgage rate increases and a looming recession..That’s because Canadian government bond yields have been trending up in recent weeks, which conversely lowers their price. In a vicious cycle, chartered banks — the major buyers of government bonds — have to charge higher interest to make up for the loss..It’s also a function of, and a contributor to, inflation. When inflation rates are higher, government bonds tend to be priced lower in order to attract the investment dollars they need to function. .Over the past two weeks, yields on the GoC five-year note have risen more than 40 basis points — the highest since 2007 before the financial crisis of 2008 — and observers expect them to climb another 20 points by the end of this week, or more than half a per cent..Given that Bank of Canada headline interest rates are priced on a spread to bond yields — usually 100 to 200 basis points, or 1% to 2% — its an early indicator that investors are expecting higher interest rates, for longer..Which means mortgages will eventually follow suit..“When yields (interest rates ) are up, then the price of the bond is down,” Ryan Sims, a rate expert and mortgage broker with TMG The Mortgage Group told Canadian Mortgage Trends (CMT) magazine. .That so-called ‘inverted’ bond curve almost always, inevitably, leads to a recession..“Bond prices have dropped quite substantially since March of 2022 and are on track for one of their worst track records since the late 1970s,” Sims continued, which also happened to be a period of ruinous interest rates under former prime minister Pierre Trudeau..How high — or low — could the financial picture go?.According to CMT, 8.5% for a five-year fixed mortgage isn’t out of the question. New borrows are already having to prequalify at 8% under the federal government’s tougher mortgage stress test rules..No surprise, two- and three-year fixed terms are already nearing 7% and that will surely go higher if the central bank raises its own rate on October 25, which many observers think is exactly what it will do if the current scenario holds..Though inflation has eased from its peak recorded last year, the August rate climbed to 4% — above the central bank's 2% target. Speaking in Calgary last month, Bank of Canada Governor Tiff Macklem said rates may not be high enough..It’s also why the Toronto Stock Market is down almost 400 points or 2% in the past five days — and all its gains thus far in 2023 — and why the Canadian dollar is sitting at a six-month low..And though some observers, such as RBC think the central bank will avoid raising rates to avoid a credit shock, markets are saying otherwise. .About 1.2 million mortgages come up for renewal each year and those are looking at a 25% payment increase. Those are just the fixed rate borrowers, variable rate mortgages have already seen a 49% jump..But the most telling leading indicator may come from the prime minister himself, who told the New York Times after the UN General Assembly people are mad at his government because they’re worried precisely about things such as higher long-term rates..“So, yeah, it’s a tough time," Trudeau said. "We know things are going to start getting better. Inflation is coming down. We think interest rates are going to start coming down probably middle of next year."
The blinkers are flashing red for future mortgage rate increases and a looming recession..That’s because Canadian government bond yields have been trending up in recent weeks, which conversely lowers their price. In a vicious cycle, chartered banks — the major buyers of government bonds — have to charge higher interest to make up for the loss..It’s also a function of, and a contributor to, inflation. When inflation rates are higher, government bonds tend to be priced lower in order to attract the investment dollars they need to function. .Over the past two weeks, yields on the GoC five-year note have risen more than 40 basis points — the highest since 2007 before the financial crisis of 2008 — and observers expect them to climb another 20 points by the end of this week, or more than half a per cent..Given that Bank of Canada headline interest rates are priced on a spread to bond yields — usually 100 to 200 basis points, or 1% to 2% — its an early indicator that investors are expecting higher interest rates, for longer..Which means mortgages will eventually follow suit..“When yields (interest rates ) are up, then the price of the bond is down,” Ryan Sims, a rate expert and mortgage broker with TMG The Mortgage Group told Canadian Mortgage Trends (CMT) magazine. .That so-called ‘inverted’ bond curve almost always, inevitably, leads to a recession..“Bond prices have dropped quite substantially since March of 2022 and are on track for one of their worst track records since the late 1970s,” Sims continued, which also happened to be a period of ruinous interest rates under former prime minister Pierre Trudeau..How high — or low — could the financial picture go?.According to CMT, 8.5% for a five-year fixed mortgage isn’t out of the question. New borrows are already having to prequalify at 8% under the federal government’s tougher mortgage stress test rules..No surprise, two- and three-year fixed terms are already nearing 7% and that will surely go higher if the central bank raises its own rate on October 25, which many observers think is exactly what it will do if the current scenario holds..Though inflation has eased from its peak recorded last year, the August rate climbed to 4% — above the central bank's 2% target. Speaking in Calgary last month, Bank of Canada Governor Tiff Macklem said rates may not be high enough..It’s also why the Toronto Stock Market is down almost 400 points or 2% in the past five days — and all its gains thus far in 2023 — and why the Canadian dollar is sitting at a six-month low..And though some observers, such as RBC think the central bank will avoid raising rates to avoid a credit shock, markets are saying otherwise. .About 1.2 million mortgages come up for renewal each year and those are looking at a 25% payment increase. Those are just the fixed rate borrowers, variable rate mortgages have already seen a 49% jump..But the most telling leading indicator may come from the prime minister himself, who told the New York Times after the UN General Assembly people are mad at his government because they’re worried precisely about things such as higher long-term rates..“So, yeah, it’s a tough time," Trudeau said. "We know things are going to start getting better. Inflation is coming down. We think interest rates are going to start coming down probably middle of next year."
