Despite low bond yields, banks and other lenders are continuing to raise rates. We talked to several rate experts to understand why.
Bond yields have plunged over 30 basis points (0.30 percentage points) over the past two weeks.

As regular readers of Canadian Mortgage Trends know, bond yields typically influence fixed mortgage rate pricing. However, that’s not the case right now. Several lenders, including three of the Big 5 banks, have recently raised rates on some of their fixed-rate products.

CIBC, Royal Bank, and TD raised their 3-, 4-, and 5-year fixed rates by 15-35 bps last week, while RBC also increased its 5-year insured and uninsured variable rates by 10 bps.

And they weren’t alone. Many other lenders across the country have also raised fixed rates, with the biggest increases typically seen in the 3- to 5-year fixed terms. At the same time, others have been reducing select rates slightly.

Government of Canada 5-year bond yield – 2024
If yields are down, why are rates going up?
There is no single factor that drives rates; instead, they are influenced by a combination of market conditions, geopolitical events, domestic data, and the broader outlook for the future.

Mortgage broker and rate expert Dave Larock noted in his latest blog that the current rate changes are “counter-intuitive,” as lenders are “concluding a round of increases to their fixed mortgage rates in response to the previous bond-yield run-up.”

He’s referencing the jump in bond yields since early October, from a level of 2.75% up to a high of 3.31% on Nov. 21.

Larock added that the rate increases could be reversed in the coming week if bond yields remain at current levels or fall further. “That outcome is far from certain,” he cautions.

Rate expert Ryan Sims agrees that banks are being slow to adjust to the rise in yields in November. “Although the [increases] are done, they are still more elevated than they were,” he said. “If bond yields stay lower, or seem to find a happy resting spot, then I could see some rate wars starting up,” he continued.

He added that since more borrowers are opting for variable-rate mortgages, he suspects lenders “are going to have to sacrifice some spread on fixed rates to get people to bite.”

If too many clients opt for variable rates, “banks could quickly get offside on term matching,” Sims says.

Lenders face a risk if they have too many variable-rate mortgages because of potential mismatches between short-term liabilities and long-term assets. If interest rates rise, it can disrupt their profitability and lead to higher costs, especially if they haven’t properly balanced their portfolio.

That, Sims says, is why some lenders have been decreasing their variable rate discounts on prime even as prime keeps falling with each Bank of Canada rate cut.

Are Canada’s big banks pulling back on competition?
As we’ve reported previously, Canada’s Big 6 banks have been unusually competitive with their mortgage pricing this fall, a trend John Webster, former CEO of Scotia Mortgage Authority, called a “silly business” as the big banks strive to meet quarterly revenue targets.

At an appearance last month Webster said a “confluence of circumstances” had driven the big banks to be more competitive with their mortgage pricing. However, he also suggested that this was unsustainable and expected more rational pricing to return by the first quarter.

Could this be the start of more rational pricing from the big banks?

Ron Butler of Butler Mortgage said there’s an aspect of seasonality to the recent increases.

“It’s the time of year when all banks end mortgage marketing campaigns, so rates always go up in December,” he told Canadian Mortgage Trends.

However, he also echoed comments from Larock and Sims, noting that despite the recent drop in bond yields, 3- and 5-year yields remain higher than they were since October.

This article was written for Candian Mortgage Trends by:

The Bank of Canada today reduced its target for the overnight rate to 4¼%, with the Bank Rate at 4½% and the deposit rate at 4¼%. The Bank is continuing its policy of balance sheet normalization.

The global economy expanded by about 2½% in the second quarter, consistent with projections in the Bank’s July Monetary Policy Report (MPR). In the United States, economic growth was stronger than expected, led by consumption, but the labour market has slowed. Euro-area growth has been boosted by tourism and other services, while manufacturing has been soft. Inflation in both regions continues to moderate. In China, weak domestic demand weighed on economic growth. Global financial conditions have eased further since July, with declines in bond yields. The Canadian dollar has appreciated modestly, largely reflecting a lower US dollar. Oil prices are lower than assumed in the July MPR.

In Canada, the economy grew by 2.1% in the second quarter, led by government spending and business investment. This was slightly stronger than forecast in July, but preliminary indicators suggest that economic activity was soft through June and July. The labour market continues to slow, with little change in employment in recent months. Wage growth, however, remains elevated relative to productivity.

As expected, inflation slowed further to 2.5% in July. The Bank’s preferred measures of core inflation averaged around 2 ½% and the share of components of the consumer price index growing above 3% is roughly at its historical norm. High shelter price inflation is still the biggest contributor to total inflation but is starting to slow. Inflation also remains elevated in some other services.

With continued easing in broad inflationary pressures, Governing Council decided to reduce the policy interest rate by a further 25 basis points. Excess supply in the economy continues to put downward pressure on inflation, while price increases in shelter and some other services are holding inflation up. Governing Council is carefully assessing these opposing forces on inflation. Monetary policy decisions will be guided by incoming information and our assessment of their implications for the inflation outlook. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is October 23, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

Global economic growth continues to slow, with inflation easing gradually across most economies. While growth in the United States has been stronger than expected, it is anticipated to slow in 2024, with weakening consumer spending and business investment. In the euro area, the economy looks to be in a mild contraction. In China, low consumer confidence and policy uncertainty will likely restrain activity. Meanwhile, oil prices are about $10 per barrel lower than was assumed in the October Monetary Policy Report (MPR). Financial conditions have eased, largely reversing the tightening that occurred last autumn.

The Bank now forecasts global GDP growth of 2½% in 2024 and 2¾% in 2025, following 2023’s 3% pace. With softer growth this year, inflation rates in most advanced economies are expected to come down slowly, reaching central bank targets in 2025.

In Canada, the economy has stalled since the middle of 2023 and growth will likely remain close to zero through the first quarter of 2024. Consumers have pulled back their spending in response to higher prices and interest rates, and business investment has contracted. With weak growth, supply has caught up with demand and the economy now looks to be operating in modest excess supply. Labour market conditions have eased, with job vacancies returning to near pre-pandemic levels and new jobs being created at a slower rate than population growth. However, wages are still rising around 4% to 5%.

Economic growth is expected to strengthen gradually around the middle of 2024. In the second half of 2024, household spending will likely pick up and exports and business investment should get a boost from recovering foreign demand. Spending by governments contributes materially to growth through the year. Overall, the Bank forecasts GDP growth of 0.8% in 2024 and 2.4% in 2025, roughly unchanged from its October projection.

CPI inflation ended the year at 3.4%. Shelter costs remain the biggest contributor to above-target inflation. The Bank expects inflation to remain close to 3% during the first half of this year before gradually easing, returning to the 2% target in 2025. While the slowdown in demand is reducing price pressures in a broader number of CPI components and corporate pricing behaviour continues to normalize, core measures of inflation are not showing sustained declines.

Given the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. The Council is still concerned about risks to the outlook for inflation, particularly the persistence in underlying inflation. Governing Council wants to see further and sustained easing in core inflation and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is March 6, 2024. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on April 10, 2024.

This press release was published on the Bank of Canada website, CLICK HERE for the original article.

The Bank of Canada today held its target for the overnight rate at 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. The Bank is continuing its policy of quantitative tightening.

The global economy is slowing and growth is forecast to moderate further as past increases in policy rates and the recent surge in global bond yields weigh on demand. The Bank projects global GDP growth of 2.9% this year, 2.3% in 2024 and 2.6% in 2025. While this global growth outlook is little changed from the July Monetary Policy Report (MPR), the composition has shifted, with the US economy proving stronger and economic activity in China weaker than expected. Growth in the euro area has slowed further. Inflation has been easing in most economies, as supply bottlenecks resolve and weaker demand relieves price pressures. However, with underlying inflation persisting, central banks continue to be vigilant. Oil prices are higher than was assumed in July, and the war in Israel and Gaza is a new source of geopolitical uncertainty.

In Canada, there is growing evidence that past interest rate increases are dampening economic activity and relieving price pressures. Consumption has been subdued, with softer demand for housing, durable goods and many services. Weaker demand and higher borrowing costs are weighing on business investment. The surge in Canada’s population is easing labour market pressures in some sectors while adding to housing demand and consumption. In the labour market, recent job gains have been below labour force growth and job vacancies have continued to ease. However, the labour market remains on the tight side and wage pressures persist. Overall, a range of indicators suggest that supply and demand in the economy are now approaching balance.

After averaging 1% over the past year, economic growth is expected to continue to be weak for the next year before increasing in late 2024 and through 2025. The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand. The subsequent pickup is driven by household spending as well as stronger exports and business investment in response to improving foreign demand. Spending by governments contributes materially to growth over the forecast horizon. Overall, the Bank expects the Canadian economy to grow by 1.2% this year, 0.9% in 2024 and 2.5% in 2025.

CPI inflation has been volatile in recent months—2.8% in June, 4.0% in August, and 3.8% in September. Higher interest rates are moderating inflation in many goods that people buy on credit, and this is spreading to services. Food inflation is easing from very high rates. However, in addition to elevated mortgage interest costs, inflation in rent and other housing costs remains high. Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%. The Bank’s preferred measures of core inflation show little downward momentum.

In the Bank’s October projection, CPI inflation is expected to average about 3½% through the middle of next year before gradually easing to 2% in 2025. Inflation returns to target about the same time as in the July projection, but the near-term path is higher because of energy prices and ongoing persistence in core inflation.

With clearer signs that monetary policy is moderating spending and relieving price pressures, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. However, Governing Council is concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed. Governing Council wants to see downward momentum in core inflation, and continues to be focused on the balance between demand and supply in the economy, inflation expectations, wage growth and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is December 6, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on January 24, 2024.

This article was published on the Bank of Canada website.

“It ain’t good.”

That’s the assessment from Ron Butler of Butler Mortgage following the latest surge in bond yields this week, and as mortgage providers continue to raise mortgage rates.

On Tuesday, the Government of Canada 5-year bond yield jumped to an intraday high of 4.46%, but have since retreated to around 4.32% as of this writing. Over the past two weeks, yields have risen by over 30 basis points, or 0.30%.

Since bond yields typically lead fixed mortgage rate pricing, rates have been steadily on the rise. And rate-watchers say that’s likely to continue.

Butler told CMT he expects rates to rise another 20 bps or so by Friday.

Following this latest rise, by and large the only remaining discounted rates under 6% will be for default-insured 5-year fixeds, meaning those with a down payment of less than 20%. Conventional 5-year fixed mortgages will be right around 6%, or just a hair under, Butler notes.

Two-year fixed terms are now all in the 7% range, while 3-year terms are now starting to break the 7% mark, Butler added.

Higher-for-longer rate expectations driving latest increases

The biggest driver of this latest surge in yields is due to markets re-pricing the “higher-for-longer” expectation for interest rates, as well as expectations that Canada will avoid a serious recession, says Ryan Sims, a rate expert and mortgage broker with TMG The Mortgage Group.

In a recent email to clients, Sims explained the reason for falling bond prices, which is leading to higher yields, since bond prices and yields move inversely to one another.

Since the interest rates offered on newly issued bonds has been rising, it has made older bonds with lower rates less attractive. This means those older bonds need to be sold for a lower price in order to make the investment worthwhile for the purchaser.

“When yields (interest rates) are up, then the price of the bond is down,” Sims explained. “Bond prices have dropped quite substantially since March of 2022 and are on track for one of their worst track records since the late 1970s.”

While rising interest rates can be a problem, Sims noted that falling bond values can also be a concern for bond owners, with Canada’s big banks being among some of the largest holders of bonds.

“As bond prices drop, they must set aside more capital against dropping prices, which in turn leads to needing higher margin on funds they loan out on new mortgages—and around and around we go,” Sims wrote.

Could 5-year fixed mortgage rates reach 8%?

Sims had previously told CMT that 4% was a major resistance point for bond yields. Since they’ve broken through that, he said 4.50% is the next major hurdle.

“Here we are knocking on the door. If we break 4.50%, we could zoom to 5.00% very easily,” he said.

“If we see further highs on the Government of Canada 5 year bond yield, then who knows how high we go. It is completely possible, based on some technical charts, to see a 5-year uninsured mortgage around the 8% range,” Sims continued. “Although that would take another leg up in yields and higher risk pricing to achieve, but it is certainly possible. It’s not my base case at this point, but certainly in the realm of possibilities.”

While an 8% 5-year fixed-rate mortgage from a prime lender is only hypothetical at this point, today’s new borrowers and those switching lenders are in fact having to qualify at 8% (and higher) rates due to the mortgage stress test, which currently qualifies them at 200 percentage points above their contract rate.

The pain being felt at renewal

Over a third of mortgage holders have already been affected by higher interest rates, but by 2026 all mortgage holders will have seen their payments increase, according to the Bank of Canada.

Mortgage broker Dave Larock of Integrated Mortgage Planners told CMT recently that those with fixed-rate mortgages have so far largely avoided the pain of higher rates that’s been more prominently felt by variable-rate borrowers. But that’s now changing as about 1.2 million mortgages come up for renewal each year.

“They know higher payments are coming and it hangs over them like the sword of Damocles,” he said.

Data from Edge Realty Analytics show that the monthly mortgage payment required to purchase the average-priced home has risen to nearly $3,600 a month. That’s up 21% year-over-year and over 80% from two years ago.

This article was written for Canadian Mortgage Trends by:

Weaker-than-expected GDP data last week likely sealed the deal for a rate hold tomorrow by the Bank of Canada. But not all economists are convinced that this marks the end of the current rate-hike cycle.

Statistics Canada reported on Friday that second-quarter economic growth contracted by 0.2% compared to Q1, well down from the Bank of Canada’s 1.5% forecast for the quarter.

The surprising slowdown in economic growth, together with rising unemployment and easing inflation, firmed up the consensus expectation for a rate hold at tomorrow’s monetary policy meeting.

It also led to some suggesting we’re now reached the end of the current rate-hike cycle.

“The broad softening in the domestic economy will almost certainly move the BoC to the sidelines at next week’s rate decision after back-to-back hikes,” wrote BMO chief economist Douglas Porter. “Between the half-point rise in the unemployment rate, the marked slowing in GDP, and some cooling in core inflation, it now looks like rate hikes are over and done.”

But not everyone is convinced.

“I think [the Bank of Canada] should have comfort to deliver another rate hike at this point, but they will probably seek the cover of the latest GDP figures and defer a fuller forecast assessment to the October meeting by which point they will also have a lot more data,” wrote Scotiabank’s Derek Holt.

“Nevertheless, I’m unsure that rate hikes are done,” he continued. “The Governor has been clear that a protracted period of actual GDP growth under-performing potential GDP growth will be required in order to open up disinflationary slack in the economy. In plain language, he realizes he has to break a few things in order to achieve his inflation goals. I don’t think he has the confidence to this point to say that they are clearly on such a path.”

What the forecasters are saying…

On Inflation:

• National Bank: “Unfortunately, it’s on CPI inflation where policymakers will and should still feel uneasy. The re-acceleration in July will continue in August (due mostly to gas prices and base effects) and could push headline inflation close to 4%. The BoC doesn’t expect a particularly benign inflation environment in the near term, noting in July that price growth should “hover around 3% for the next year.” Governing Council will therefore tolerate some near-term upside pressures, particularly if it comes with weakness elsewhere in the economy. However, a stabilization above 3% would be problematic and could mean additional tightening.”

On future rate hikes:

• Desjardins: “There’s been sufficient weakness in the economy to warrant a pause on Wednesday, even with inflation data that will leave policymakers feeling uneasy. We expect that July’s hike will prove to be the last of this tightening cycle and recent data reinforce that view.”
• TD Economics: “We think [the economic slowdown] will continue, justifying our call for the BoC to remain on the sidelines for the rest of this year.” (Source)
• Scotiabank: “The Governor needs to be mindful that market conditions have eased of late and careful not to drive a further easing that could replay the rally in 5-year GoC bonds earlier this year that set up cheaper mortgages and drove a Spring housing boom.” (Source)

On GDP:

• TD Economics: “While federal government transfers in July may result in a short-term boost in the third quarter, we believe Canada has entered a stage of below trend economic growth. This should continue through the rest of this year, as the impact of high interest rates work through the economy to prevent another acceleration in demand.”

The latest Bank of Canada rate forecasts

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.

This article was written for Canadian Mortgage Trends by:

Rate hikes are definitely off the table

The Canadian economy weakened surprisingly more in the second quarter than the market and the Bank of Canada expected. Real GDP edged downward by a 0.2% annual rate in Q2. The consensus was looking for a 1.2% rise. The modest decline followed a downwardly revised 2.6% growth pace in Q1. (Originally, Q1 growth was posted at 3.1%.) According to the latest monthly data, growth dipped by 0.2% in June, and the advance estimate for economic growth in July was essentially unchanged. This implies that the third quarter got off to a weak start.

The Bank of Canada forecasted growth of 1.5% in Q2 and Q3 in its latest Monetary Policy Report released in July. The central bank is now justified in pausing interest rate hikes when it meets again on September 6th. Today’s report is consistent with the recent rise in unemployment. It suggests that excess demand is diminishing, even when accounting for such special dampening factors as the expansive wildfires and the BC port strike.

Some details of Q2 Growth

Housing investment fell 2.1% in Q2, the fifth consecutive quarterly decline, led by a sharp drop in new construction and renovations. No surprise, given the higher borrowing costs and lower demand for mortgage funds, as the BoC raised the overnight rate to 4.75% in Q2. Despite higher mortgage rates, home resale activity rose in Q2, posting the first increase since the last quarter of 2021.

Significantly, the growth in consumer spending slowed appreciably in Q2 and was revised downward in Q1.

Bottom Line

The weakness in today’s data release may be a harbinger of the peak in interest rates. Inflation is still an issue, but the 5% policy rate should be high enough to return inflation to its 2% target in the next year or so. As annual mortgage renewals peak in 2026, the increase in monthly payments will further slow economic activity and break the back of inflation.

The Bank of Canada will be slow to ease monetary policy, cutting rates only gradually–likely beginning in the middle of next year. In the meantime, the central bank will continue to assert its determination to do whatever it takes to achieve sustained disinflationary forces.

Today’s release of the US jobs report for August supports the view that the Canadian overnight rate has peaked at 5%. (The Canadian jobs report is due next Friday). Though the headline number of job gains in the US came in at a higher-than-expected 187,000, the unemployment rate rose to 3.8% as labour force participation picked up, growth in hourly wages was modest, and job gains in June and July were revised downward.

In Canada, 5-year bond yields have fallen to 3.83%, well below their recent peak shown in the chart below.