Canada’s declining bond yields facilitated the availability of affordable mortgage credit, which boosted home prices. However, the situation is now changing as Government of Canada (GoC) 5-year bond yields are experiencing a significant increase. These yields directly impact fixed mortgage rates, and within a short period, they have nearly reversed the discount introduced after the US banking crisis. The rise in rates will likely reduce leverage and deter the growth of home prices.
The Surge in Canadian 5-Year Government Bond Yields
Canadian government bond yields have rapidly rebounded, with the GoC 5-year bond yield reaching a closing rate of 3.579% last week. This represents a substantial increase of 27.13 basis points over just five trading days, an astonishing climb. Compared to the previous month, the yield is now 48.38 bps higher, with more than half of this increase occurring in the past week. Today’s trading is closed due to the US holiday.
Recent Decline in Bond Yields Contributed to Home Price Boost
Previously, the yield had peaked at 3.651% in early March, only to drop to a low of 2.766% following the US banking crisis. The combination of global liquidity injections and looming uncertainties led to decreased yields, reducing the cost of fixed-rate mortgages with similar terms.
During this period, Canadian home prices also reversed their course. Notably, the typical increase in home prices closely aligned with the added leverage resulting from the lower rates. Even the Bank of Canada (BoC) acknowledged the role of cheaper mortgages in fueling higher home prices.
Bond Yields Are Soaring: Get Ready For Fixed Rate Mortgages To Rise Next Week
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Fixed Rate Mortgages going UP
By the end of next week all of the 4.65% 3-Yr Fixed and 4.39% 5-Yr Fixed are GONE
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— Ron Butler (@ronmortgageguy) May 17, 2023
Potential Impact of Rising Yields on Canadian Real Estate
Therefore, the recent reversal in bond yields deserves attention, as it is merely seven bps away from reaching the previous high. The anticipated rise in yields will almost certainly lead to an increase in mortgage rates, creating challenges for further growth in home prices. Whether this development will be sufficient to cause a decline in home prices remains uncertain.
