rates
BECAUSE WE ARE INVERTED Bond yields are falling with implications for fixed mortgage rates. It also means the yield curve, which has been inverted, is on a path to normalize.
In real estate, bond yields matter because they are the basis on which fixed mortgage rates are determined by lenders. The good news for borrowers is that yields for all term lengths of bonds have been declining of late in Canada, and fixed rates are indeed following suit. For example, the 5-year Government of Canada yield, which is the basis for lenders’ popular 5-year fixed rate, is now below 3% and falling. Beyond mortgage rates, we also care about bond markets because when the yield curve inverts—which it did 2 years ago—trouble could be a-brewin'.
More specifically, an inverted yield curve— where the 2-year bond yield is higher than the 10-year yield—has historically been a good predictor of recessions. That said, the fact that the yield curve is inverted today doesn’t necessarily mean we’re on a highway to the danger zone as it reflects a falling interest rate environment. As the Bank of Canada moves towards its goal of a neutral policy rate, expect shorter-term yields to fall and the shape of the yield curve to normalize. At that point, expect the curve to look a lot more like it did in 2017, albeit with rates higher across the board.
A REVERSION ON THE HORIZON
6.0%
4.6%
5.0%
3.6%
4.0%
3.3%
3.0%
3.1%
2.0%
1.2%
1.8%
1.0%
0.0%
LONG TERM
MONTH
YEAR
YEAR
YEAR
YEAR
YEAR
AUGUST
AUGUST
AUGUST
SOURCE: BANK OF CANADA DATA: GOVERNMENT OF CANADA BOND YIELDS, SELECT TERMS TO MATURITY
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