Fixed mortgage rates are back on the rise after Canadian bond yields surged to a 13-year high on Wednesday.
The Government of Canada 5-year bond yield, which leads fixed mortgage rates, has been on a tear, surpassing the 3.20% threshold this week—a level not seen since 2008. It has now risen over 60 basis points in under two weeks, closing higher each day since May 27.
Fixed rates headed to 5%
Given that fixed mortgage rates almost always follow bond yield movements, a new leg-up for fixed rates is all but guaranteed, and has already started.
Multiple national lenders have begun hiking rates for certain terms this week, including most of the big banks like RBC, TD, Scotiabank, CIBC and National Bank of Canada.
Nationally available, uninsured 5-year fixed special rates are now averaging 4.73%, according to data tracked by Rob McLister, rate analyst and editor of MortgageLogic.news. That’s up from 4.37% a month ago, and up from 2.87% at the start of the year.
That means today’s fixed-rate mortgage borrowers who are putting more than 20% down are paying about $100 more in monthly payments per $100,000 of mortgage debt compared to buyers six months ago, based on a 25-year amortization.
Insured 5-year fixed discounted rates, which are typically only available for those making a down payment of less than 20%, are averaging 4.43%, up over 20 basis points this month.
“Borrowers getting a mortgage this month best prepare for more sticker shock. We’re about to see another wave of fixed-rate hikes,” McLister wrote in a recent Globe and Mail column. “With yields surging, average 5-year fixed rates could be 15 to 25 bps higher within seven to 10 days or so.”
What’s driving the fear?
Aside from overall inflation concerns, the latest fear du jour for investors is the relentless rise in oil prices, with WTI crude oil breaching a multi-year high of over $122.
Not only that, but a growing number of voices are suggesting oil prices could challenge the 2008 high of USD$147, with a possible rise to over $150 a barrel.
On Wednesday, Jeremy Weir, CEO of multinational commodity trading company Trafigura, told the Financial Times we’ve got a “critical situation” right now as oil prices could reach a “parabolic state.”
“If we see very high energy prices for a period of time, we will eventually see demand destruction,” he said. “It will be problematic to sustain these levels and continue global growth.”
His comments come on the heels of remarks from JPMorgan Chase & Co. CEO Jamie Dimon, who last week warned investors to “brace yourself” for a potential economic “hurricane.”
Is a Canadian recession inevitable?
The Bank of Canada’s primary objective is reining in runaway inflation, even if that comes at the expense of economic growth and home prices.
“Our main concern is bringing inflation back down to make buying essentials less expensive for Canadians and to ensure higher inflation doesn’t become entrenched,” Bank of Canada Deputy Governor Paul Beaudry said in a speech last week. “History shows that once high inflation does become entrenched, it’s hard to bring it back down without hurting the economy.”
Since the Bank of Canada was slow to get started with its latest rate-hike cycle, it’s now having to deliver rate hikes in a “fast and furious” style to convince consumers the Bank will be able to bring inflation back to the Bank’s target of between 2% and 3%.
As a result, economists expect between 100 and 150 basis points (1 to 1.5 percentage points) in additional rate hikes by the end of the year, which would bring the Bank’s key policy rate to between 2.50% and 3%. As of today, it’s at 1.50%.
“The Bank isn’t ruling out a 75-bps hike in July, saying it is ‘prepared to act more forcefully if needed,’” noted BMO senior economist Sal Guatieri, adding that BMO now expects the Bank to raise rates by 50 bps at each of its next three policy meetings.
“The risk of a downturn will rise, especially next year, depending on how far central banks need to take rates above neutral to restore price stability,” he wrote, adding the U.S. Federal Reserve is likely to deliver half-point hikes at its next four meetings.
“Recession odds could be as high as 45% given that the Fed has never achieved a soft landing in at least six decades when inflation was this high and the unemployment rate and policy rates this low at the start of a tightening cycle,” he added.
Economists are split roughly 50-50 on the odds of Canada entering a recession in the coming years, according to a survey from Finder.com.
“…we see two alternative routes to a hard landing [for the BoC and Fed],” noted economists Karyne Charbonneau and Avery Shenfeld of CIBC.
“They could tighten too much and too fast, and their desired slowdown turns instead into an outright recession,” they wrote. “Conversely, by acting too slowly, and giving time for inflation expectations to build, they could leave a recession as the only tool for getting inflation back to earth.”
The latest rate forecasts
The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.
|5-Year BoC Bond Yield:
|5-Year BoC Bond Yield:
|BMO||3.00% (+75bps)||3.00% (+25bps)||NA||2.90%||2.90%|