Have Fixed Mortgage Rates Hit Bottom?

Economic optimism has bond yields surging versus last week. That’s got many wondering if fixed mortgage rates will soon follow.

The 5-year bond yield—a leading indicator for fixed mortgage rates—is now above 0.50% for the first time since early June.

Let’s take a quick look at why this is happening and what it means for mortgage rates…

The Catalysts Driving Up Bond Yields

Two headline factors have converged to push bond yields materially higher for the first time in months.

• The U.S. election outcome – U.S. President Donald Trump may continue to dispute Joe Biden’s Saturday election victory declaration, but Biden’s declared win provides far more certainty than there was last week. Markets like certainty and stability, and sell bonds when they don’t need a safe place to park their money. Selling bonds pushes up bond yields (rates) given the inverse relationship between price and yield.
• COVID-19 vaccine results – Pfizer provided early trial results on Monday, suggesting its vaccine could be 90% effective against COVID-19. The company is on track to potentially distribute the vaccine as soon as first quarter 2021.

A stable hand at the helm of the U.S. economy and a potentially effective weapon in the fight against COVID are bullish for the economic recovery. A growing economy means rising inflation. And higher inflation lowers the value of bonds, but increases their yields.

What do rising bond yields mean for mortgage rates?

Government of Canada bond yields are one of the key factors that guide fixed mortgage rates. That’s because lenders benchmark fixed rates against bond yields. They do this because:

• many mortgages are actually funded in the bond market
• lender funding costs are linked to the bond market (e.g., 5-year GIC rates follow 5-year bond yields)
• investors and lenders have a choice of where they deploy capital (rising yields makes mortgages less attractive as an investment at lower rates)

Long story short, when bond yields rise, so do fixed mortgage rates.

The question now is, how high and for how long will yields climb? Economists and the Bank of Canada itself have both forecasted low rates into 2023.

A strategy for rate shoppers

While mortgagors have been blessed for months with record-low mortgage rates, those rates could be finding their bottom.

Those who’ve been on the sidelines waiting for mortgage rates to fall even lower, the best advice we can provide is, don’t push your luck.

If you need a mortgage in the next 120 days, and a fixed term fits your situation, lock in a rate immediately. Our own Rob McLister wrote about this in the Globe & Mail yesterday, noting “Lenders' profit margins are tight and rising yields are tightening them further. If yields climb higher, banks may not delay in taking fixed rates with them.”

As for variable rates, they’ve seen their day in the sun. Prime rate is highly unlikely to drop further anytime soon. That gives floating-rate borrowers far less potential benefit.

Moreover, there is no upfront rate advantage to variables anymore — and 5-year fixed rates usually outperform at the bottom of economic cycles (which is hopefully where we are today).

All that is to say, if we have to lean towards a new rallying cry in the mortgage market, it might just be: “lock in to win.”