With the Bank of Canada’s next rate announcement scheduled for Oct. 28, many fixed-rate mortgage holders may be waiting to see what the bank will do that might affect their mortgage rate. However, bond markets have a more immediate effect on mortgages than the Bank of Canada; when bond yields increase, so do fixed mortgage rates and bond yields have increased recently and mortgage borrowers are paying more. “Five-year government bond yields in Canada have climbed 20 basis points over the past month, and any borrower renewing or initiating a fixed-rate loan today is absorbing costs the central bank has yet to formally set,” says Canadian Mortgage Professional (CMP). “A global bond sell-off is driving yields higher across developed markets, (with) the US Federal Open Market Committee (FOMC) (hiking) rates 25 basis points at its September meeting.” “The Federal Reserve Bank of New York estimates roughly 70% of the rise in US 10-year government bond yields reflects the resulting shift in rate expectations. Canada has not been immune, but the domestic picture is materially different.” RBC economist Claire Fan, on the RBC Economics podcast The 10-Minute Take, says “The key difference here is that Canada’s economy is starting from a really relatively softer spot. "There's still, by many measures, slack in the Canadian economy.”.Fan explains the softness changes how the bank responds to inflationary pressure and with slack persisting in the labour market, “businesses have less capacity to rapidly pass cost pressures onto consumers, giving the central bank more flexibility than the Fed when weighing inflation trade-offs.” Fixed-rate mortgage holders are feeling the pressure. “The distinction between the overnight rate and bond yields matters here,” says Fan. “Floating-rate borrowers, those on variable-rate mortgages or lines of credit tied to prime, are insulated from bond market moves until the bank acts. Fixed-rate borrowers are not.” Fan added the yield curve, the spread between longer and shorter-term borrowing costs, can drive fixed mortgage pricing as much as can the bank’s overnight rate, depending on each particular mortgage product and term a borrower holds. Fixed-rate mortgages are more popular in Canada than variable rate and the fixed rates are moving. “Any borrowers these days, if they were to roll over their prior fixed-rate loan, so it could be a household rolling over or renewing their five-year fixed-rate mortgage, as an example, all of them will likely already be feeling the squeeze from higher bond yields, even before the Bank of Canada actually delivers those rate hikes that drove those bond yields higher,” says Fan. .“For brokers managing renewal conversations, the pressure extends further than the current rate environment. The household debt service ratio is expected to edge higher into 2027,” says CMP, which Fan addressed. “For Canadian households, this does mean that some of the debt servicing reprieve that we’ve seen over the past two years has likely run its course, and the growth rate in debt payments will likely start outpacing the growth in household disposable income again. And that could potentially push the debt servicing ratio higher into 2027,” she says.
