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:
