Canadians should say good-bye to the 15-or-so year experiment with cheap debt, because it’s over. Government of Canada (GoC) 5-year bond yields continued to boom, accelerating this week. The yield now sits at the highest level since before the Great Recession and isn’t expected to slow down. Mortgage rates will see a big impact from this, and are heading to levels thought were no longer possible to hit. That is, until inflation also hit levels no longer thought possible, requiring higher rates to stabilize the economy.
Canadian Bond Yields Are Climbing Even Faster Than Expected
The GoC 5-year bond yield is soaring at one of the fastest rates ever. It reached 3.185% on Wednesday morning, climbing 30.96 basis points (bps) over the past 5 trading days. For context, over the past 30 days it climbed 34.63 bps, so about 90% of the increase was just this past week.
Over the past 30 years, this yield has only increased this fast one other time — during the 90s bubble. Needless to say, this isn’t a great sign for real estate prices.
The Era of Low Rates Is Gone, The New Normal Is Healthier Finance
Canada hasn’t seen yields at these levels since the Global Financial Crisis (GFC). “Canadian 5-year government bond yields are now trading above 3% for the first time in over a decade,” explains Robert Kavcic, a senior economist at BMO.
“This is a massive reversal from the 0.3% pandemic low set around mid-2020. Those who were lulled into thinking that pandemic-era interest rates were the new normal are getting a bit of a rude awakening with respect to financing costs.”
Higher Yields Means Much Higher Mortgage Rates
The 5-year GoC bond yield has a direct impact on a key mortgage interest rate — the 5-year fixed rate mortgage. Since capital competes for similar terms, rising yields directly influence mortgage costs. This means expect much higher mortgage rates in the not-so-distant future.
“… the last time the 5-year sat around this level in 2007-08, 5-year fixed mortgage rates were typically north of 5%,” says Kavcic.
A whole generation of people are under the impression that cheap money was the new normal. In reality, it was more like a 15-year experiment due to the GFC. “We seem headed in that direction, which would have been inconceivable for many in recent years. Meantime, surging 5-year yields reflect the market view that short-term rates will be close behind, so there won’t be any hiding in variable rates,” he explains.
Traditionally, the 5-year fixed rate mortgage is the most popular type of mortgage, as home buyers locked-in costs. Normally bond yields rise to cool excessively easy credit, sending a signal to short-term rates. As the Bank of Canada (BoC) ignored the bond market and soaring inflation, home buyers sought variables instead of throttling. It was a highly unusual situation caused by a miscalculation from the BoC that isn’t expected to persist in the future. That’s a good thing.
Last week the head of BMO Capital Markets also stated he expects a reset towards more historic rates. He also stated he would be “shocked” if Canadian real estate prices don’t drop double-digits. All assets are expected to normalize with capital costs, helping to cool destabilizing inflation.
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2022-06-08 23:01:34
