As Canadian bond yields fall, watch for fixed rates to follow

A 'sold' sign in front of a home in the York neighborhood of Toronto, Ont. Photo by Cole Burston/Bloomberg files

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Trade uncertainty has put a medium-term cap on Canadian interest rates, largely for three reasons.

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First, Trump’s trade antics are dragging on the North American economy.

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Second, uncertainty is causing many investors to hide out in government bonds, pushing yields lower, which in turn weighs down fixed mortgage rates.

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And third, bond markets are well aware that a trade breakdown with the U.S. could shove Canada straight into recession.

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As of Thursday afternoon, Canadian government yields are diving to ten-week lows. That trims lenders’ funding costs and may let fixed rates edge down further, assuming Friday’s U.S. inflation report doesn’t spoil the mood.

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For now, the leading nationally advertised rates are holding steady, with only the default-insured five-year fixed lower on the week (by three basis points).

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Meanwhile, nearly half of prime borrowers continue to choose floaters.

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The appeal is straightforward: 30 to 40 basis points of upfront savings, lighter penalties on a variable, the freedom to lock in whenever the spirit moves you, and the eternal optimism that rates will fall — or, at minimum, not go anywhere for a year or more.

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For now, insured variables can be had for as low as 3.34 per cent in Alberta, B.C. and Ontario via Butler Mortgage.

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Thanks to the laws of nature in the mortgage market (lender risk, regulations and capital rules), uninsured varieties will run you at least 40 basis points more.

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If floating strikes your fancy, just be certain you’re comfortable with the upside rate risk if CPI reports start running hot again this spring. Fixed-payment variables — as distinct from adjustable-rate mortgages with payments that float — offer the most budgetary protection of the two.

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Just keep in mind that with most lenders, if rates jump, you must still cover at least the full monthly interest owing. Mind you, it would take over 250 basis points of rate hikes before fixed-payment variable borrowers would have to worry about that.

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For the best national insured and uninsured mortgage rates, updated daily, please visit our mortgage rate page here.

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