How Do Bond Yields Impact Fixed Rates?

Fixed Mortgage Rates Follow Bond Yields Right?

We all ‘kind of’ know that bond yields affect the cost of fixed rate mortgages. But why, and how, and what does any of this mean to you? We’ll do our best to sum this up for you here.

Tracking Canadian government bond yield trends, particularly the 5-year bond yield, can offer a sneak peak into the trend direction of fixed mortgage rates.

Changes in the various termed (5yr, 3yr etc) bond yields can hint at potential adjustments in similar termed fixed mortgage rates. If bond yields are on the rise over several days, banks may follow suit by increasing their fixed mortgage rates. Conversely, if bond yields are declining, banks might consider lowering their rates accordingly.

While a spike in Bond Yields will likely result in quick interest rate increases from the banks. Alternatively, a dip in bond yields may not trigger rapid rate decreases, as the banks try to gauge longer term trends before lowering borrowing costs.

What’s Happening Now?

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The Chart above pulls daily Bond Yield data directly from the Bank of Canada.

What’s The Mechanism?

Banks use customer deposits to fund mortgages for homebuyers and homeowners.

Once a pool of mortgage debt has been established, the banks are able to group all of the mortgages up and sell them in the bond market to investors (like other banks, pension funds & private investors). These are called mortgage bonds.

Investors purchase these bonds with the promise/expectation that the bank will pay a specified return on the purchase. This return is the bond’s yield, and represents the bank’s cost to lending you money on a mortgage.

The Difference Between Your Mortgage Rate and Bond Yields

This is called the spread, and is where the bank covers the cost of administering your mortgage, and (of course) generates a profit.

How Big is the Spread?

In a typical market environment, the usual margin between fixed mortgage rates and secured government bond yields ranges from about 100 to 200 basis points, equivalent to 1% to 2%.

Why does it not exceed this range?

It all comes back to competition. While banks require funds to function, they also contend with other banks for investments. Competition acts as a regulating force, shaping rates and prices according to market dynamics of supply and demand.

Consequently, competition serves as a check on how much higher fixed rates can climb.

A Recent History

The Chart below compares 5yr fixed mortgage rates to 5yr bond yields over history. Mortgage rate data is delayed approximately 3 months.

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It becomes super obvious from the chart above that fixed mortgage rates do in fact correlate with bond yields over time.

The chart also provides an exceptional visualization of the spread between bond yields and fixed mortgage rates. Where the spread is thinner, these could be times of increased competition for lending. Where the spread is wider, competition is a little less fierce and the banks are making more money.

In Conclusion

You don’t need to be an economist to understand trend lines and the general movement of fixed mortgage rates. A general awareness of the mechanisms and context can provide some benefit to you.

Despite what bond yields are doing the following is still true:

Timing a property purchase and your life around the movement of bond yields will never be a realistic or advisable strategy.
When life calls, and you need to purchase, renew or refinance it’s definitely a good idea to understand the borrowing landscape you’re about to participate in.
A good mortgage broker will monitor bond yields daily and can identify opportunities or priorities as they relate to your specific situation.
Starting a pre-approval, renewal or refinance as early as possible will ALWAYS benefit you when working with a good proactive mortgage broker.

An Explainer on Bond Yields

Fixed Mortgage Rates Follow Bond Yields Right?

What’s Happening Now?

ZOOM IN/OUT ABOVE

What’s The Mechanism?

The Difference Between Your Mortgage Rate and Bond Yields

This is called the spread, and is where the bank covers the cost of administering your mortgage, and (of course) generates a profit.

How Big is the Spread?

A Recent History

ZOOM IN/OUT ABOVE

In Conclusion

Start Now and Secure These Rates

5yr Fixed Insured

5yr Variable Insured

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An Explainer on Bond Yields

Fixed Mortgage Rates Follow Bond Yields Right?

What’s Happening Now?

ZOOM IN/OUT ABOVE

What’s The Mechanism?

This is called the spread, and is where the bank covers the cost of administering your mortgage, and (of course) generates a profit.

How Big is the Spread?

A Recent History

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ZOOM IN/OUT ABOVE

In Conclusion

Start Now and Secure These Rates

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5yr Fixed Insured

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5yr Variable Insured

Keep Learning