The Canadian bond market is sending real estate a message — credit is going to tighten. Government of Canada (GoC) 5-year bond yields hit the highest level in a year today. Yields for the segment are now triple the level they were last year. Since GoC bond yields influence mortgage rates, this will drive the cost of a mortgage higher.
Government Of Canada 5-Year Bond Yields And Mortgages
The GoC 5-year bond yield is related to the interest charged on mortgages of similar lengths. Credit markets compete by looking for lenders willing to part with their money. Mortgages are a little less secure than GoC bonds, so they pay higher yields. After all, if they charged the same rate, why wouldn’t you just get a government bond? They need to add a premium, usually somewhere between 15 and 30 basis points. As the 5-year bond yield rises, so does the interest cost for an insured 5-year fixed-rate mortgage.
Rising rates are generally good news, meaning the economy needs less stimulus. Higher financing costs tend to consume more income, and reduce profits though. Therefore it tends to cool demand for goods, which can slow the economy’s growth. This makes it much more difficult for home prices to rise. During the pandemic, the opposite happened, and bond yields dropped like a stone…read more.