What will plummeting bond yields mean for the spring mortgage market?

Fixed rates have ticked downwards in recent weeks

What will plummeting bond yields mean for the spring mortgage market?

The decline of bond yields may mean that mortgage rates will be lower by spring, according to experts.

The Financial Post reported that the benchmark five-year bond yield decreased from 3.5% to 3.44% on Dec 5 before eventually falling to 3.4% after one day. That put five-year yields down by more than 100 basis points from the 4.42% seen last October.

Notably, the decline went on even as the central bank has kept the overnight rate at 5% while still not fully closing the door on the possibility of another rate hike.

James Orlando, a senior economist at TD Economics, said in a research note that the BoC was left with the task of aligning its interest rate policy to adhere to the current conditions of the economy as bond yields fall.

“The next few months are going to be challenging given our expectation that the unemployment rate will continue to rise, which will hit consumer spending and bring inflation down along with it,” said Orlando.

“Markets don’t think the bank will be able to get too comfortable. The next move is clearly a cut, with odds pointing to the first move in April,” he added.

The mortgage industry is anticipating that interest rates will be easing soon since fixed mortgage rates typically adjusted whenever there are changes in bond yields. Robert McLister, a mortgage strategist, told the Financial Post that investors were reading the signs that pointed towards a weakening economy and were anticipating the inevitable.

“Investors see the economy crumbling and know what happens next: rate cuts,” said McLister.

“Plunging yields are taking fixed mortgage rates back below six per cent for uninsured mortgages and below five per cent on insured rates. If inflation behaves, we could see rates in the low 4% range by spring,” he added.

However, McLister warned about building expectations on interest rates to mirror the decline in yields and said that borrowers should hope for rate cuts but still prepare for the possibility that they may not ease until 2025.

“Rate cut expectations may be jet fuel for home prices this spring, given prices are already showing hints of a bottom. Unfortunately, a resurgent real estate market could also be inflationary and limit how far rates might fall,” he explained.

“A massive amount of scheduled mortgage maturities are expected within the next two to three years which has gotten the attention of the Federal Government. As a result, the bond market now expects rates to decline over the next few years,” said Alex Leduc, chief executive of Perch, a digital mortgage advisory.

Ron Butler of Butler Mortgage, told the Post that he expected lending rates to lag the decline in bond yields because of the seasonality element in the function of interest rates, noting that banks usually offered competitive rates in February and March to attract first-time homebuyers.

“This means they don’t usually provide their best rates in the colder months of December and January. They like to make a little more profit before they have to start fighting for the spring market,” he said.

The next interest rate announcement by the central bank is slated for January 24, 2024.