People hear the Bank of Canada predicting no rate increases until 2023 and take that as gospel. Maybe they shouldn’t.
The Bank of Canada’s key overnight rate—which more directly impacts floating-rate mortgages—doesn’t constrain fixed mortgage rates in the same way. The latter are driven more by what the bond market thinks the Bank of Canada (and the economy) will do in the future.
Bond yields continued their march higher on Monday, as:
This is not what inflation hawks want to hear. And there are untold said hawks dumping government bonds as we speak. (When selling pushes down bond prices, interest rates rise.)
A smattering of non-bank lenders have begun hiking fixed rates, including the biggest non-bank lender in Canada, First National. Others are threatening to hike rates imminently.
So far, we’re seeing announcements of 10-30 bps increases, depending on the lender and term. Expect further hikes given the 5-year Canada Mortgage Bond (CMB), which guides fixed rates at some of Canada’s most competitive insured/insurable lenders, closed near its high today after soaring 30 bps since February 1.
There’s still no sign of increases from the big guns (major banks), but if this yield climb persists, it’s just a matter of time.
New Mortgage Record
Real estate secured lending balances reached an all-time high in 2020, reports StatsCan. Mortgage debt and home equity lines of credit totalled $1,927.9 billion at the end of December, up 7.6% year-over-year. That’s on the back of 12.6% higher home sales.
Interestingly, non-mortgage debt declined 1.5% versus the prior year. That was thanks in part to government income subsidies.
5-year “breakeven rates” in the bond market suggest U.S. inflation could average 2.37% over the next five years, according to Bloomberg. That would be conspicuously above the Fed’s 2% target—which is noteworthy given the long-term correlation between U.S and Canadian inflation.