Why the window for cheap mortgage money may be narrowing

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In other words, if U.S. rates surge, we need to be prepared as Canadian mortgage holders, even if nothing domestically seems to warrant hikes.

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More on fixed rates

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JPMorgan raised its long-run 10-year Treasury forecast, implying U.S. rates could add another 80-plus basis points if inflation stays glued near three per cent, its average over the past year.

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The company also flagged de-globalization as a rate-positive force. It said global trade is not collapsing. In fact, it rose 11 per cent in the first quarter, despite war and tariffs.

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Still, supply shocks are more frequent, and bringing manufacturing back to North America creates duplicative investment, raising capital demand (and hence, rates).

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Speaking of which, tech companies are borrowing massive gobs of money, Shenfeld says, and that appetite could keep lifting global rates, with at least “some degree of spillover into the Canadian five-year bond yield.”

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It’s already showing up in longer-term yields, whose trends often trickle down to the mortgage-critical five-year bond.

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Specifically, we just saw the U.S. 30-year yield trade at its highest since July 2007.

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And here’s the thing: it’s not all inflation fear causing it, despite popular belief.

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Inflation breakevens, which approximate inflation’s impact on bond yields, are relatively tame.

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The biggest problem is that investors are demanding fatter risk premiums to hold longer-term bonds. And given America’s fiscal outlook, who can blame them?

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The worst-case scenario

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Ever-increasing U.S. debt also raises doom-loop risk, warns the C.D. Howe Institute.

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That is, if investors start seriously doubting sustainability, government borrowing costs rise.

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If government borrowing costs rise, interest payments swell federal deficits and rates rise further — and the loop feeds itself.

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C.D. Howe fellow Martin Eichenbaum says, “That is not alarmism. It is arithmetic.”

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For his part, Shenfeld tells me, “I don’t believe anyone thinks the U.S. will default on U.S. dollar debt.”

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The likelier problem is that markets will anticipate much more U.S. debt issuance (debt supply), and that could push rates up.

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That scenario, he expects, will have “some” impact on Canadian mortgage rates.

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The Canadian borrower’s problem

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If these theories hold up, it means the window for cheap mortgage money may be narrower than hoped.

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As we speak, markets and economists both point to upward rate risk over the next year or so.

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Of course, no one knows how long the hike cycle would last, but rates are cyclical. That means what goes up virtually always comes down. The Bank of Canada’s two per cent inflation target pretty much ensures it.

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CIBC sees the U.S. neutral rate eventually drifting down as the AI investment boom decelerates and the “benefits” of AI (fewer people needed to do the same work) cut costs.

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By then, particularly if Washington curbs its runaway spending habit, North American growth should stumble well before a five-year mortgage term is up.

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The question is whether investors start punishing American fiscal habits. If so, fixed mortgage rates (for new borrowers) could stay elevated for longer.

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But even if we see monetary tightening as some expect, Shenfeld suggests that nobody should lose sleep over large imminent mortgage rate spikes.