The Tug of War Between Trade Uncertainty and the Energy Shock
April 13, 2026
The Strait of Hormuz re-opened briefly last Friday. That gave us an indication of what our bond yields and mortgage rates might look like if the US/Iran war ends any time soon. After the ceasefire was announced, global bond yields immediately dropped, and energy prices eased.
In Canada, gasoline, diesel and jet fuel prices were also helped by our federal government’s suspension of its fuel excise tax until September 7 (which will reduce the price of a litre of gasoline by about ten cents).
Unfortunately, the Strait closed as quickly as it opened.
The US Navy fired on an Iranian-flagged cargo ship that ignored repeated warnings to stop. Iran responded by declaring the Strait closed again to commercial vessels.
The fear that higher energy prices will cause inflation to accelerate across our broader economy will continue to weigh on bond-market investors for as long as the Strait remains closed. But if the latest US inflation data are any indication, there is no evidence, thus far, of that inflationary pass through occurring.
Last week we learned that the overall US Consumer Price Index (CPI) did surge higher by 0.9% in March on a month-over-month basis, with about three-quarters of that increase attributed to energy costs (led by a 21% spike in US gas prices). But, importantly, US core inflation, which strips out volatile food and energy prices, increased by only 0.2% month-over-month in March, less than the consensus forecast of 0.3%.
If we look past the strong price pressure from rising energy prices, which we had a brief opportunity to do last Friday, the rest of the current Canadian inflation backdrop appears otherwise benign.
Unlike in the US, all our key inflation gauges were essentially back to their 2% target levels before the war began. Shelter prices had been the primary cause of our above-target inflation over the post-COVID years, but they increased by only 1.5% in February (annualized) and will cool further in the months ahead.
The Bank of Canada (BoC) recently assessed our labour market as “weak”, consumer confidence just hit an eleven-month low, and the most interest-rate sensitive parts of our economy (real estate, consumer spending, business investment) are hibernating.
The inflationary risks tied to the US/Iran war are significant and should be acknowledged. But so too should the reality that bond-market investors are still pricing in an inflation future that looks very different from our current reality (and is far from guaranteed).
The Latest on Mortgage Rates
Government of Canada (GoC) bond yields remained volatile last week and finished the week a little lower than where they started.
Fixed mortgage rates have stabilized for the time being, but borrowers should expect more volatility ahead.
Variable-rate discounts also held mostly steady last week.
Three weeks ago, I speculated that bond-market investors were getting ahead of themselves. Since then, the futures market has reduced its bet on BoC policy-rate hikes in 2026 from 0.75% to 0.25% (and those odds are still falling).
I continue to believe that the bond-market is pricing in worst-case inflation scenarios, which may be caused, at least in part, by COVID-related recency bias.
For now, I am maintaining my contrarian call that the Bank’s next eventual move will be a cut. I expect the deflationary impacts from the ongoing US trade conflict to outlast the inflationary impacts from the US/Iran war.
My Take on Today’s Mortgage Options
Fixed rates remain volatile.
Three- and five-year fixed rates remain the most popular choices. If the spread between those two options is minimal, I think five-year fixed rates offer better value.
Most of the borrowers I am working with right now are opting for the stability of fixed rates, and I fully appreciate their appeal.
That said, the relative saving offered by today’s variable rates has increased now that spiking bond yields are putting significant near-term pressure on fixed mortgage rates.
I expect that variable mortgage rates will produce the lowest borrowing cost over their full five-year terms, although the potential that they will take borrowers on a bumpy ride has increased since the start of the US/Iran war.
BoC Governor Macklem has confirmed that the Bank will look through the oil-price spike over the near term. But if the war drags on and the inflationary impact from higher oil prices becomes broader and more entrenched, there will come a time when the Bank must tighten.
For now, my assessment is that we won’t get to that point. But so much depends on how long the US/Iran war will last and if/when the Strait of Hormuz will re-open. That remains an open question.
Important note: Anyone choosing a variable rate should do so only if they are comfortable with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs (and in some cases, higher payments).
Insider’s Tip for Borrowers
Your income is the single most important factor on your mortgage application because it confirms your capacity to pay, which is the most reliable indicator of a loan’s overall risk.
This post details the two key income tests that are used by lenders, outlines the basic income documentation that will typically be required, and offers advice on how to put your best foot forward.
Three Posts Every New Visitor to My Blog Should Read
This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages amidst trade-related economic uncertainty.
For myriad reasons, some of them unanticipated, many Canadians end up having to break their fixed-rate mortgages. This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender.
This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract. (They are not standard and can vary in important ways.)
