Higher Bond Yields Trigger Hike in Mortgage Rates

Cheap money and an era of near-record low interest rates could soon be coming to an end. For first-time home buyers, this means the window of opportunity for locking in a mortgage at reasonable rates is beginning to close.

And it’s been a long time coming. Government interest rates in Canada and the United States have been exceedingly low since the worst of the financial crisis. In fact, over the last three years, government bond yields have been in a free fall. In May, the five-year Government of Canada bond yield dropped below 1.2%.

A lot has changed in the last few months.

While bond yields were expected to climb, their rapid rise has been a lot quicker than anyone had anticipated. Since the beginning of May, the five-year government bond yield has climbed from 1.15% to 1.76%. Over the same period of time, the 10-year Government of Canada bond yield has climbed from 1.68% to 2.48%. Yields on the 30-year bond crossed the 3.5% mark, the highest level since October 2011.

It’s important to be aware of bond yields, because they have a direct impact on virtually every corner of the economy, from residential mortgage rates to pensions. The sudden increase in bond yields—the return you get on a bond—has caught many Canadians off guard; in the past month alone, the Royal Bank of Canada has raised mortgage rates twice.

Because the Canadian economy is inexorably linked to the U.S. economy, it’s essential that first-time home buyers also be aware of U.S. bond prices. Since the beginning of May, the yield on 10-year U.S. Treasuries has jumped from about 1.9% to 2.5%, their highest rate since August 2011.

Longer-term bond yields have been on the rise over the last few months, on the heels of encouraging economic conditions in the U.S. Recent data shows that second-quarter U.S. gross domestic product came in at a robust 1.7%, beating projections of 1.1%.

The stronger results means the U.S. Federal Reserve could start to wind down its $85.0-billion-per-month bond-buying program this fall. The Federal Reserve initiated its bond-buying program back in 2008, in an effort to kick-start the American economy out of the Great Recession. The Bank of Canada is expected to raise interest rates in 2014.

After hovering near record lows for years, how high are bond yields and mortgage rates expected to go? Some economists expect to see the U.S. 10-year Treasury yield hitting between five and six percent within the next two years.

At Canadalend.com, it’s our opinion that, on the backs of an improving North American economy, interest rates in Canada and the United States have begun their ascent. And, with many economists expecting the second half of the year to be even stronger, interest rates could surprise many by moving significantly higher.

While the Bank of Canada has said it doesn’t expect to raise its lending rates until 2014, this doesn’t mean Canadian banks won’t raise their long-term mortgage rates beforehand. In fact, it appears they have already begun to do so.

With bond yields and mortgage rates on the rise, now is the perfect time for first-time home buyers or those looking to refinance to contact their local Canadalend.com agent and get their long-term mortgage pre-approved.

Source:
Shmuel, J., “It’s a bear market for bonds ahead: CIBC,” National Post July 30, 2013; http://business.financialpost.com/2013/07/30/its-a-bear-market-for-bonds-ahead-cibc/.