And, while no one has ever seen a range like this in our lifetimes, ultimately the 5-year yield will break out. When that happens, fixed mortgage rates will follow.
We won’t try to guess how rates will run. In fact, it’s always possible the first breakout could be a false one, given the economy is on such uncertain footing. Ultimately, however, vaccines and government support programs will fuel a sustained GDP rebound and higher yields. When the Bank of Canada reduces (“tapers”) its bond-buying program later this year, that too should add further lift to rates.
In the meantime, there are signs of relative strength already. When we got the second big wave of COVID, the 5-year yield could have broken its 0.297% floor from August. But it didn’t. Since then, it’s approached the 0.50% level four times. With almost any widely traded asset, when the price keeps coming back to a specific level, it ultimately breaks that level. That’s especially true if it runs up to the breakout point in the face of weak fundamentals. On Friday, we saw Canada’s economic fundamentals deteriorate further, with unemployment shooting up to 9.4% and an estimated 212,800 jobs lost (albeit all part-time). Yet, despite this disappointment, the 5-year yield rose.
A sustained breakout means we’ll no longer see 5-year fixed rates like 1.25% (for insured mortgages) and 1.59% (for uninsured mortgages). They’ll disappear for who knows how long. Maybe weeks, maybe months, maybe years—until the next economic downturn.
If you’re out there home shopping or thinking of a refinance, keep all this in mind. If the 5-year yield busts through 0.50% and runs 10+ basis point higher, you’ll need a rate hold / pre-approval in place, or it could cost you.
“We might be willing to target a small overshoot [of the 2% inflation target], like the Fed has done, actually aim for an overshoot. That’s a question that we’re pondering right now.”—Bank of Canada Deputy Governor Lawrence Schembri (Source)