Bond Yields and Mortgage Rates in Canada | Explained

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Bond Yields and Fixed Mortgage Rates in Canada

Fixed mortgage rates in Canada are not determined by the Bank of Canada's policy rate, contrary to a popular misconception. They instead follow Government of Canada bond yields on the bond market. Understanding this fundamental link is essential for any borrower or mortgage broker seeking to anticipate rate movements and make informed decisions.

Bond yield

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The Mechanism: From Bonds to Mortgage Rates

When a financial institution grants a fixed-rate mortgage, it must fund that loan by borrowing on financial markets. Its funding cost is directly tied to Government of Canada bond yields of the same maturity. For a 5-year term mortgage, the 5-year bond yield serves as the benchmark. The lender then adds its spread, which typically ranges from 120 to 200 basis points (1.20% to 2.00%). CMHC also plays an important role through its Canada Mortgage Bonds (CMB) program, which allows lenders to access reduced-cost funding by securitizing their mortgage portfolios.

Factors Influencing Bond Yields

Inflation expectations: when markets forecast rising inflation, investors demand higher yields to compensate for the loss of purchasing power, pushing fixed rates higher.
Monetary policy: decisions by the Bank of Canada and the U.S. Fédéral Reserve influence market expectations and capital flows between the two countries.
Economic data: statistics on employment, GDP, retail sales, and consumer confidence shape bond investor expectations.
Safe-haven demand: during periods of geopolitical or financial uncertainty, investors flock to government bonds, driving yields down and consequently lowering fixed rates.
Fiscal policy: the fédéral government's debt level and bond issuance needs influence market supply, which can affect yields.

Practical Application for Quebec Borrowers

For real estate buyers in Quebec, monitoring bond yields can translate into tangible savings. If yields are trending downward, waiting a few weeks before locking in a rate may be advantageous. If yields are rising quickly, it is prudent to ask your lender for a rate hold of 90 to 120 days to protect against further increases. Your AMF-certified mortgage broker can track these indicators and guide you on the optimal time to secure your rate.

Frequently Asked Questions

What exactly is a bond yield?

Bond yield is the annual rate of return an investor receives from buying a Government of Canada bond and holding it to maturity. It is determined by the market: when the bond price rises (high demand), the yield falls, and vice versa. It is the key indicator for predicting fixed mortgage rate movements.

Why do fixed rates follow 5-year bonds and not the policy rate?

The Bank of Canada's policy rate influences short-term rates (variable rate, lines of credit). Five-year fixed rates instead follow 5-year Government of Canada bonds because that is the market where lenders fund their fixed-term mortgages. The two markets are related but can move independently.

Where can I check Canadian bond yields?

The Bank of Canada website publishes daily benchmark yields for all maturities. Search for 'Government of Canada benchmark bond yields.' Financial websites like Bloomberg, Trading Economics, and major Canadian bank platforms also offer real-time data.

Do fixed rates and bond yields always move together?

Fixed rates follow the general trend of bond yields, but not instantaneously or in perfectly proportional fashion. Lenders also adjust their spread based on competition, loan demand, and risk appetite. During periods of strong competition among lenders, the spread can compress, benefiting borrowers.

What makes bond yields rise or fall?

The main factors are: inflation expectations (rising inflation = rising yields), decisions by the Bank of Canada and the U.S. Fédéral Reserve, economic data (employment, GDP, retail sales), and global appetite for safe assets. During crises, investors buy Canadian bonds as a safe haven, driving yields down.

Which bond yield should I watch for my mortgage term?

Watch the bond whose maturity matches your mortgage term. For a 5-year term (the most common), follow the 5-year Government of Canada bond. For a 3-year term, the 3-year bond. For a 10-year term, the 10-year bond. Your AMF-certified mortgage broker can guide you in this monitoring.