Millions of Canadians are hanging on the BoC’s 2023 rate hike forecast. That’s a tenuous strategy if your plan is to lock in “at the right time.” A lot of positive things can happen to our economy in two to three years and fixed rates almost always rise ahead of positive news.
Tens/hundreds of billions of dollars of stimulus is still ahead from the Canadian/U.S. governments. That will strengthen the floor under interest rates, suggesting the days of record lows may be coming to an end in this rate cycle.
Interestingly, by the end of 2021 the BoC will own almost 50% of the Canadian government bond market if its current bond-buying (QE) pace keeps up, notes CIBC rate strategist Ian Pollick. Above 50% is the danger zone due to adverse liquidity effects, according to the BoC’s own analysis. We wouldn’t bet on QE persisting much into 2022, if at all. This “tapering” of Canadian QE could be yet another factor driving higher fixed mortgage rates unless U.S. yields unexpectedly dive again amidst a weaker-than-expected recovery. That said, until the BoC signals a taper is forthcoming, it’ll try to prevent a sizable run-up in 5-year yields.
By the time COVID case counts start heading in the right direction and enough people are vaccinated, both of which should happen by spring-ish or summer, say analysts, the market could start pricing in Bank of Canada policy tightening. That will be a signal to investors to take yields higher (i.e., sell bonds). Higher yields mean higher fixed mortgage rates.
There’s one other observation worth noting. Notice how government bond yields are no longer downtrending. That’s despite the grim economic reality of record COVID case counts and further lockdowns. When bad news doesn’t hammer yields, it often suggests the market is gearing up to run in the other direction. That run may not happen for weeks or months (or maybe it will, who knows), but it will happen ultimately.
How to Play It
Today’s Bank of Canada meeting changes nothing. The visibility beyond Q1 2021 is little better today than it was in October. Most of the economy (not all) will bounce back next year and the 5-year outlook, therefore, remains arguably more bullish for mortgage rates than bearish. “…We believe the risk is that growth (and inflation) surprises the BoC to the upside next year, so that it may need to [raise rates] ahead of what it currently expects…,” Bank of America said today.
For mortgage shoppers, the fixed vs. variable rate decision still hinges mainly on these same factors. One of those factors is the rate spread between 5-year fixed and floating mortgages. It remains historically tight at 30 basis points or less, meaning you’re not paying much for interest rate security. That, plus the fact that Canada’s economy should rebound in 2021 could heighten variable-rate risk as we move into 2022.
A few quick comments on specific terms: Unless you have a particular need for 2- to 3-year financing (i.e., a 2- to 3-year fixed mortgage), we’d be hesitant to recommend those terms right now given: (A) their rates are elevated vis-à-vis other terms, and (B) you might find yourself renewing too late — i.e., after the BoC begins hiking rates and after yields run higher. If you need thoughts on other terms, see our quick review on RATESDOTCA.
Long story short: Hope is on the horizon. Stocks are making record highs for a reason. Bond yields could follow higher in the not-too-distant future. A bet on variable rates is a bet on a failed recovery. That’s a risky wager when all-time-low 4-year fixed rates and record-low 5-year fixed rates are a bird in the hand.