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A Yield Breakout is Forthcoming…Wait for It

  • 5-year fixed mortgage rates tend to shadow 5-year government yields. And for most of nine months, the 5-year yield has been locked in a 21-basis-point range, a range so tight it was practically inconceivable prior to COVID.
  • 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)

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  • Gazer says:

    If you forget about restaurants, hospitality and brick and mortar retail, I think the economy is doing pretty well. It may be overstimulated if you ask me. Once people can eat in restaurants again I think we’ll see an inflation upsurge. That will all happen around the late spring or summer when economic activity starts peaking naturally. I would not want to be in a variable rate much longer.

  • Kung-p says:

    Hi spies. Is there a way to lock down a rate past the normal 120 days guarantee period?


    • The Spy says:

      Hey Kung, Yes. BMO has 130 days. And if you want longer, some lenders (e.g., Desjardins) go out up to 365 days. A rate premium generally applies for the extra rate hold — due to higher hedging costs for the lender.

  • Ralph Doncaster says:

    Hey Rob, can you explain your comment, “That’s especially true if it runs up to the breakout point in the face of weak fundamentals”. I would think if fundamentals are weak, then the the move up in rates won’t have legs. But I don’t really get technical analysis…

    • The Spy says:

      Hey Ralph, Prices don’t rise to well-formed resistance levels without underlying strength. Moreover, when the fundamentals appear negative but prices rise anyway, it suggests relative strength. It’s a sign of traders looking past the bad news. These are bullish indications.

  • Scot Howard says:

    Hey Spy, could you help me reason/evaluate my situation.

    My renewal comes up in August 2021. I can start getting rate holds in May 2021. I signed a 2-year term in August 2019 at 1.69%.

    My penalty, if I were to terminate today, is actually quite low, ~3k.

    I’ve put in some numbers in your cashback calculator, and with these low rates, I can save around $3.3k if I terminate today and switch. I’m debating whether I should do it. Doing it now gets me incremental, albeit quite minimal, savings over the remainder of my term, but more importantly, additional term at a low rate.

    My ideal scenario is to wait until May 2021, lock in a rate, and switch at renewal, not paying the prepayment penalty. However, I am worried, as your article suggests that fixed rates may rise.

    I have the option to do a rate hold now and see where things go over the next few months. Each month I wait would eat into the $3.3K savings, while essentially keeping my prepayment penalty almost the same. Using this logic, should I look to make my decision ASAP? Or should I also consider it by saying I would be saving money on the back end a new 5-year mortgage term, presumably if rates are higher then?

    • The Spy says:

      Hey Scot,

      Nice job with that 2yr pick. The best strategy depends largely on whether a 5-year fixed is the most suitable term for you. Assuming it is, if you can break now and make up your penalty before maturity, that’s a reasonable play to lock in a record-low 5yr rate long term. A lot can happen to rates between now and May.

      Before that, I’d first ask your existing lender if they can do a low-cost early renewal or blended rate. Then compare the cost of each

  • Amin says:

    Hi Spy,

    I’m trying to understand if a 1.59% 5 year fixed is the lowest available in Toronto or not. This is for a new purchase uninsured mortgage for a house over
    1million . When I input my numbers in the rate comparison it brings up 1.28 or 1.33% but when I look at the footnotes of some it says a maximum of750k mortgage. Than you!

    • The Spy says:

      Hi Amin, Yes, 1.59% is the lowest *advertised* uninsured rate in Toronto that we’re aware of. I’ve heard of big banks like TD going lower on a discretionary basis for $1 million+ loans but it’s very case-by-case.

  • b rod says:

    Hi Rob. bit of a crossroads here. 18 months left on my -.96% variable rate. would love to lock in a 5 year fixed while my rate is fully open(hsbc) but i’m likely to sell in next five years.

    i feel like i’m basically stuck with signing another 5 year variable, and having rates be substantially higher when that term ends/we sell. or can go 5 year fixed but likely to incur large penalties for breaking/selling early… i’m stuck

    • The Spy says:

      Hi B Rod, There are 5-year fixed lenders that would charge just a three-month interest penalty if rates went sideways or up. Your penalty risk with such lenders is primarily a scenario where rates fall further — and you seem more concerned with higher rates than lower rates.

      If your plan is to sell and move, you’d also need a lender with good portability and blend & increase options.

      Another option is a shorter fixed term like a 3-year (or a term length that matches up as well as possible with your potential moving timeframe). There’s little sense getting a 5-year term if you know you won’t be in the home for five years.

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