How U.S. inflation's 'bumpy ride' could threaten Canadian mortgage rates
Last December, Bank of Canada governor Tiff Macklem suggested we’d ride an economic rollercoaster on the way back to two per cent inflation. “We can’t rule out bumps along the way,” he warned.
U.S. Federal Reserve boss Jerome Powell sang a similar tune, foreshadowing a “bumpy ride” back to the two per cent target. Yet, for whatever reason, most people either missed the memo or blew off these caveats.
Lo and behold, we hit another bump on Wednesday, and it wasn’t in Canada. It was south of the border, where U.S. inflation registered a spicy 3.5 per cent, eclipsing forecasts and coming in 0.3 percentage points hotter than the prior month.
That news was a buzzkill for low-rate hopefuls and economists, who expected Wednesday’s BoC meeting to foreshadow rate cuts and lower yields. The central bank indeed reassured us of coming rate relief, but the U.S. CPI drama stole the spotlight.
Uncle Sam’s inflation flare-up and a dud of a bond auction jacked five-year Treasury yields up a staggering 23 bps. Given the cozy link between our countries’ bond markets, soaring U.S. yields dragged Canadian five-year yields 14 basis points higher. It was the biggest spike since October and a reminder that Canada does not control its destiny on mortgage rates.
The fact that our yields follow U.S. yields like an imprinted duckling is not a new problem for borrowers. U.S. and Canadian five-year yields are practically financial BFFs, with a 0.96 correlation (out of 1). So, when U.S. yields take off, they pull a whole wagon of borrowing costs with them, including Canadian fixed mortgage rates.
Given our mortgage market is hitched to the U.S. star, it begs two questions. First, how likely is it that March U.S. inflation is more than just a
Read more on financialpost.com
