Global Bond Market Volatility Threatens to Drive Up Canadian Mortgage Rates
Long-term Canadian government bond yields touched their highest levels in more than 16 years on Tuesday, as a continuing global bond sell-off lifted borrowing costs worldwide.
Economists said the rise in Canadian yields, which came despite Statistics Canada’s release of cooler-than-expected new inflation data, reflected global concerns over inflation and geopolitical uncertainty sparked by the war in Iran.
For Canadians worried about the cost of mortgages, however, a higher five-year yield, which anchors five-year fixed-rate mortgages, could be more of an immediate concern. That rate rose to its highest in nearly 22 months on Tuesday before recovering to trade flat from Friday’s close.
“Five-year Government of Canada bond yields can be heavily impacted by global developments,” Royce Mendes, head of macro strategy at Desjardins, said in an e-mail. “While expectations for Bank of Canada policy decisions typically play a role, over the past week domestic yield moves have been dominated by spillovers from other jurisdictions. As a result, the soft economic inflation data haven’t pulled yields down in that space.”
“My base case is that five-year yields will come down. But given this is a global phenomenon driving five-year yields, it’s hard to have a lot of confidence in that right now,” he said.
Inflation data released Tuesday suggested that Canadians have been somewhat insulated from the effects of rising prices. High gasoline prices drove Canada’s headline inflation rate to 2.8 per cent in April, compared with 2.4 per cent in March, but this was lower than the 3.1 per cent expected by analysts polled by Reuters.
Lorne Gavsie, head of macroeconomic and foreign exchange strategy at CI Global Asset Management, said the Bank of Canada faces challenges in navigating an uncertain macroeconomic and geopolitical environment, as it is more easily able to achieve price stability through policies aimed at managing demand, rather than supply-driven shocks, like high fuel prices linked to the conflict in the Middle East.
“There’s a real, entrenched fear that this [war] continues and we’re starting to see the rates market price that in,” said Mr. Gavsie. Strong earnings growth among U.S. companies also has the potential to feed into broader inflationary growth, he added.
“At the end of the day, what we really need to focus on and have a view on is whether the energy situation continues and whether prices remain elevated, or whether there’s some form of resolution that can provide some easing to that pricing pressure.”
Beyond the headline numbers, economists said core inflation remains muted, in part because of easing housing costs. In a note to clients, Bank of Montreal chief economist Douglas Porter called the inflation report “unambiguously soft” and predicted it would dampen speculation about coming interest rate hikes.
In the latest sign of a weak housing market, the Teranet-National Bank House Price Index fell for a fifth consecutive month in April, a report from National Bank of Canada showed on Tuesday, bringing cumulative price declines to 3 per cent over the past five months.
“Affordability challenges … continue to weigh on property prices, as evidenced by the fact that the largest declines over the past year were recorded in the country’s least affordable markets, while the strongest increases were observed in the most affordable cities,” Daren King, senior economist at National Bank Capital Markets, said in the report.
Higher mortgage rates lifted by rising bond yields also illustrated repercussions of the conflict in the Middle East on Canadian housing, Mr. King said.
Historical mortgage data from Ratehub showed Canadian five-year fixed mortgage rates rising from 3.79 per cent at the end of February to 4.04 per cent by the end of March. The five-year government bond yield has risen by about 0.69 percentage points since the end of February.
Ron Butler, principal broker at Butler Mortgage, said further increases in the five-year yield could hit the housing market, noting that the pass-through from the five-year government bond yield to the five-year fixed-rate mortgage is “almost point-for-point.”
“I can absolutely guarantee you that if we start to see a five-year fixed rate that’s approaching 5 per cent … we will see a definitive dampening again in the marketplace,” he said.
“We were selling a lot of mortgages at 3.69 per cent]in February,” he said.
“So this move to 4.49 that we’re experiencing is real, but a move to 4.89 … even an upwardly mobile couple would say, ‘I don’t know how we’re going to do this.’ The payments are too high.”
This article was first reported by Th Globe and Mail
