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Bond Yields Surge, Raising Fixed Mortgage Rate Concerns

This week has witnessed a notable rise in bond yields, potentially putting upward pressure on fixed mortgage rates if this trend persists, according to experts.

Bond yields, a precursor to fixed mortgage rate movements, have surged by over 20 basis points (0.20 percentage points) since last Friday.

The 5-year Government of Canada bond yield, which climbed to 3.92% on Tuesday, is poised to reach the next resistance threshold of 4%, industry observers suggest.

Drivers of the Recent Bond Yield Shift

Unlike previous instances, this surge in bond yields doesn’t seem to have been triggered by major economic data releases or central bank statements. Various factors might be contributing to this development, as Ryan Sims, a broker at TMG The Mortgage Group and former investment banker, explains.

“One possible reason could be the large-scale selling of bonds by institutional investors, resulting in the push of yields,” Sims shared with CMT. He also pointed out the potential role of pension funds, hedge funds, and mutual funds in rebalancing portfolios, and the possibility of lending capital shortages as banks tighten lending standards. The thinner trading volumes in the market could also be causing some distortions in pricing.

Sims emphasized that the 5-year yield repeatedly encountering the 4% resistance level is significant. He hinted that if the yield doesn’t breach this level convincingly, a downward trajectory might be in store, noting the formation of a bearish head-and-shoulders pattern.

Impact on Fixed Mortgage Rates

However, if the yields do manage to break and maintain a level above 4%, it could result in another round of hikes for fixed mortgage rates, which have been climbing since April.

While there was a continuous increase in select fixed mortgage rates by banks and mortgage providers in recent weeks, the pace of these hikes has started to slow down.

National data from reveals that the lowest available deep-discount 5-year fixed mortgage rate is now above 5%. Though some exceptions exist for insured and insurable products, the 5-year fixed terms are among the few mortgage options offering rates in the 5%-range. Most providers now offer shorter-term mortgages (1- to 3-year) at rates within the 6% and 7%-range.

Despite the current elevated levels, experts believe further increases could be looming if bond yields maintain their upward momentum.

Ron Butler of Butler Mortgage highlighted the remarkable shift in rates over the past year. He emphasized that while higher rates are possible, economic slowdown and even potential recession could ultimately lead to a decline in bond yields and fixed mortgage rates.

This forecasted economic shift might occur by the end of the year or in the first two quarters of the next year, according to Butler. He expects rates to be lower than today’s levels, though not reaching the rates witnessed in 2021.

Affordability Concerns Emerge for Borrowers

The surge in both fixed mortgage rates (stemming from bond yield increases) and variable mortgage rates (linked to Bank of Canada rate hikes) is creating affordability challenges for borrowers.

Ben Rabidoux of Edge Realty Analytics highlights that mortgage rates haven’t reached these levels since 2007, impacting affordability significantly, particularly in higher-priced markets like Ontario and British Columbia.

In his recent newsletter, Rabidoux noted that the monthly payment required to buy a typical home has surged by 12% or nearly $400 in just four months.

Bank of Canada data indicates that interest costs for mortgage borrowers have risen nearly 70% year-over-year as of the first quarter, prior to the two most recent rate hikes.

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