Canadian bond yields start falling. What does it mean for fixed mortgage rates and central bank’s decisions?

On Friday, bond yields went down by more than 0.30% amid economic concerns replacing inflation issues.

Bond yields, affecting fixed mortgage rates, were down from Thursday’s 3.15% to as low as 2.84%, also marking a large decline from 3.59% reported in mid-June.

Such a drop was caused by rising expectations of an economic downturn.

According to rate analyst Rob McLister, most bond traders believe the inflation is reaching its peak and “the recession risk is real.”

So what does it mean for fixed mortgage rates?

“The central banks are expected to face an economic downturn,” – McLister says. “That means lower economic growth, lower inflation, and lower mortgage rates.”

Last week, the average deep-discount 5-year fixed mortgage rates fell by approximately 0.10% as the 5-year bond yield went down from its latest high.

“In case nothing else changes, a 5-year yield below 3% will guarantee that big-bank uninsured 5-year fixed rates will go back to about 4%,” – McLister noted.

Now, we can see this tendency going on, but it’s still early to talk about fixed rates having reached a top.

And what about variable rates?

Variable rate holders will hardly see a relief in the nearest future, with the prime rate (affecting variable mortgage rates and lines of credit) going up from pandemic 2.45% to the current 4.70%.

More hikes are coming. The Bank of Canada is expected to raise its key lending rate again at its next meeting.

According to most economists, the overnight rate will go up to 3.25% by the end of 2022 – it’s 0.75% higher than today.

The average deep-discount 5-year variable rate is heading towards the 4% level. The combined hikes of both fixed and variable rates are having a significant influence on affordability, analyst Ben Rabidoux says.

He noted that the average monthly mortgage payment on a typical home has grown by $1,150 during the previous 10 months.

Next week, markets’ attention will be drawn to the U.S. Fed rate decision, which is expected to make another 0.75% increase. Its decision may affect future Bank of Canada rate movements. The Bank’s next rate meeting is scheduled for September 7.

Here are the latest interest rate forecasts from the Big 6 banks.

	Bank of Canada Target Rate/Banks’ Prime rate: year-end ‘22	Bank of Canada Target Rate/Banks’ Prime rate: year-end ‘23
BMO	3.25%/5.45%	3.50%/5.70%
CIBC	3.25%/5.45%	3.25%/5.45%
NBC	3.25%/5.45%	3.25%/5.45%
RBC	3.25%/5.45%	3.00%/5.20%
Scotia	3.50%/5.70%	3.50%/5.70%
TD	3.25%/5.45%	3.25%/5.45%