How Bond Yields Affect Fixed Mortgage Rates
There are several factors that impact fixed mortgage rates in Canada. The single biggest factor is bond yields. Bond yields have an inverse relationship to Bond prices.
In the recent years with the economic conditions the Canadian Government bonds have been a safe haven for investor money. With a huge amount of money pouring into bonds for safety the price of the bonds has been driven up which then drives the bond yield down.
As shown in the graph above, there is a direct relationship between bond yields and fixed mortgage rates.
The typical spread between the government bond yield and the fully discounted fixed mortgage rates fluctuates with market conditions such as investor appetite and competing investment opportunities such as corporate bonds and foreign markets.
As of today, the 5 year government bond yield is 1.26 with fully discounted 5 year fixed mortgage rates at 2.89%… the spread is 172 basis points (1.63%) this is within the lenders current comfort zone.