Canadian Mortgage Rates May Fall As Soft Inflation Lowers Yields

Canadian Mortgage Rates May Fall As Soft Inflation Lowers Yields

Canadians looking for some mortgage relief might get some in the coming months. At least those looking for a fixed rate term. This morning, Government of Canada (GoC) 5 year bond yields fell sharply in response to soft American inflation data. Falling yields are part of a broad trend currently driving down mortgage costs. Though how people respond to the return of cheap money may determine whether this trend continues, or inflation is reignited. 

U.S. Inflation Came In Weaker Than Expected—Good News For Canada

Canada’s biggest trade partner has a big influence on domestic prices. American inflation is quickly exported via this trade process. In addition, since most commodities are priced in U.S. dollars, a strong Greenback can drive the cost of goods higher in Canada. Consequently, their inflation data can lead to a big shift in Canadian inflation expectations.

America’s softer than expected Consumer Price Index (CPI) this morning was good news for Canadian borrowers. Annual CPI growth fell 0.5 points to 3.2% in October, within spitting distance of the target range. 

CPI still has some distance to travel but it is coming down fast. The market consensus is no further hikes may be needed, but that can change if there’s any reacceleration. Experts still delayed their forecast for the first rate cut by another month, now expected in July 2024. 

Canadian Bond Yields Are Falling, Which Will Help With Lower Mortgage Rates

Canadian yields fell in response, which will trickle into lower fixed rates for mortgages. This morning, the initial reaction to the data pushed the GoC 5 year bond yield 0.19 points to an intraday low of 3.751%. Other fixed rate bonds responded with declines as well, which will help to drive fixed term mortgage rates lower across the board. 

Government of Canada 5 Year Bond Yield

Source: TradingView. 

Since reaching the low, a partial recovery has been made. However, the decline is also part of a wider trend of falling yields against a more stable inflation environment. 

Falling Canadian Yields Is A Broad Trend, Which Means Cheaper Mortgages

The GoC 5 year bond yield opened 0.0377 points lower than it did a week prior. The past month has seen a 0.5169 point drop, but they still remain 0.48 points higher than last year. However, we’re still seeing more cooling.

Canadian fixed rates have already begun responding to lower yields. But be warned, inflation expectations don’t flow in a straight line. The highly speculative market has seen major demand shifts on just minor easing of expectations. This reaction ironically drives inflation expectations higher, preventing rates from falling.