Home News Canadian Mortgage Costs To Hit “Inconceivable” Levels After Bond Yields Surge: BMO

Canadian Mortgage Costs To Hit “Inconceivable” Levels After Bond Yields Surge: BMO

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Canadians should say goodbye to 15 years or so of experimentation with cheap debt now that it’s over. Government of Canada (GoC) Five-year bond yields continued to skyrocket, accelerating this week. Yields are currently at their highest levels since before the Great Recession and are not expected to slow down. Mortgage rates are going to be heavily impacted and are moving towards levels that were no longer considered impossible to hit. This means higher interest rates will be needed to stabilize the economy until inflation reaches levels that seem impossible anymore.

Canada’s bond yields are rising even faster than expected

GoC’s 5-year bond yields are skyrocketing at one of the fastest rates ever. It reached 3.185% on Wednesday morning, rising 30.96 basis points (bps) over the last five trading days. In context, it has risen 34.63 bps over the last 30 days, so about 90% of the increase was only last week.

Over the last three decades, this yield has only increased so quickly during the bubble of the 90s. Needless to say, this is not a good sign of real estate prices.

The era of low interest rates is over, new and usually healthier finance

Canada has not seen yields at these levels since the Global Financial Crisis (GFC). “Canada’s 5-year Treasury yield has traded above 3% for the first time in more than 10 years,” he said. BMO..

“This is a major reversal from the 0.3% pandemic low set around mid-2020. Those who have assumed that interest rates in the pandemic era are the new normal are a little rude awakening on funding costs. We are welcoming you. ”

Higher yields mean much higher mortgage rates

Five-year GoC bond yields have a direct impact on key mortgage rates, namely five-year fixed rate mortgages. Higher yields have a direct impact on mortgage costs, as capital competes on similar terms. This means expecting much higher mortgage rates in the not too distant future.

“… The last time five years approached this level in 2007-08, five-year fixed mortgage rates were usually 5% north,” says Kavcic.

I get the impression that cheap money is a new common sense across generations. In fact, it was like a 15 year experiment thanks to GFC. “We seem to be heading in that direction, which many wouldn’t have thought of in recent years. On the other hand, the market’s view that a surge in five-year yields will soon delay short-term interest rates. It reflects, so it doesn’t hide in floating rates, “he explains.

Traditionally, 5-year fixed rate mortgages are the most popular type of mortgage because homebuyers have a fixed cost. Bond yields usually rise to cool overly easy credit and signal short-term interest rates. As the Bank of Canada (BoC) ignored the bond market and rising inflation, homebuyers sought variables rather than restraints. This is a very rare situation caused by a miscalculation from the BoC and is not expected to continue. That’s good.

Last week, the head of BMO Capital Markets also said he was hoping for a reset to more historic rates.He also mentioned him If Canada’s real estate prices don’t fall by double digits, you’ll be “shocked”.. All assets are expected to normalize at the cost of capital and help cool volatile inflation.

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