Plummeting bond yields could mean lower mortgage rates by spring, say industry watchers
Twenty months after the Bank of Canada launched one of the most intense interest-rate hiking cycles on record, the bond market is indicating that cuts are on the way.
Government of Canada benchmark five-year bond yields dipped below 3.5 per cent on Dec. 5 to 3.44 per cent, according to data on the central bank’s website, then fell below 3.4 per cent a day later.
That put five-year yields down more than 100 basis points from their peak of 4.42 per cent on Oct. 3.
The decline accelerated even as the Bank of Canada kept its key overnight rate at five per cent on Wednesday, while leaving the door open for another rate hike.
According to James Orlando, a senior economist at TD Economics, falling bond yields leaves the Bank of Canada with the formidable task of aligning its interest-rate policy to address current economic conditions.
“The next few months are going to be challenging given our expectation that the unemployment rate will continue to rise, which will hit consumer spending and bring inflation down along with it. No wonder the Canada 2- and 10-year yields have fallen approximately 90 basis points over the last two months,” Orlando said in note after the Bank’s December decision.
“Markets don’t think the bank will be able to get too comfortable. The next move is clearly a cut, with odds pointing to the first move in April,” Orlando said.
The mortgage industry is anticipating that relief on interest rates is coming, as fixed mortgage rates usually adjust in response to changes in bond yields.
Mortgage strategist Robert McLister said investors are reading the signals of a weakening economy and anticipating the inevitable.
“Investors see the economy crumbling and know what happens next: rate cuts,” McLister said.
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