The inflation trade pretty much exploded last week.
Investors bet that we’re going to get more inflation than our policy makers expect, and they drove up bond yields in response.
The Government of Canada (GoC) five-year bond yield that our five-year fixed mortgage rates are priced on surged from 0.67% at the start of the week to 0.88% at Friday’s close (and it was at only 0.43% when February began). Lenders responded by raising their five-year fixed rates anywhere from 0.15% to 0.25% (so far).
This bond yield surge is a global phenomenon that is primarily underpinned by the belief that US inflation is about to sustainably rise (which I also wrote about in last week’s post). If that happens, the US will export its rising inflation through trade, and it will permeate the globe.
The five-year Government of Canada (GoC) bond yield surged higher last week, and that means that our five-year fixed mortgage rates are on the way up.
In fact, I’m surprised they haven’t risen already.
In today’s post I’ll explain what is pushing rates higher and offer advice on how borrowers who are currently in the market for a mortgage can navigate the current environment.
I hope that everyone enjoyed the Family Day long weekend.
I used the holiday yesterday for its stated purpose, so there won’t be a new post this week. I’ll be back next Monday as usual.
In the meantime, here are links to five of my recent posts covering key mortgage-related topics:
- What’s in store for fixed and variable mortgage rates in 2021?
- Why is the Bank of Canada hinting that it may cut its policy rate again?
- What would happen to mortgage rates in a worst-case pandemic scenario?
- The obvious flaw in the Bank of Canada’s newfound optimism.
- How mortgage rates will be impacted by the race between the virus and the vaccines.
The Bottom Line: The Government of Canada bond yields that our fixed mortgage rates are priced on held steady last week. As such, our fixed mortgage rates were mostly unchanged, with one lender announcing a small cut.
Variable mortgage rates were unchanged last week.
The consensus predicted that our economy would shed 40,000 jobs last month, largely as a result of lockdown measures reintroduced in Ontario and Quebec. Instead, we lost 213,000.
That’s on top of the 53,000 job drop in December, when infection rates put an end to the impressive employment recovery that had run through the summer and fall.
Overall employment has now dropped by 858,000 over the past twelve months, and Statistics Canada estimates that 529,000 of those losses were COVID-related.
Canadian mortgage rates are at rock-bottom levels, and the only debate today is over how long they will remain there.
The Bank of Canada (BoC) recently offered a more optimistic economic forecast that was tied to the earlier than expected arrival of vaccines. It cautioned that our recovery will still be drawn out and uneven, but less so if we are able to meet the vaccination timetable that our federal government is committing to.
Vaccination rates are critical now because our economy will continue to be hampered by varying stages of lockdown until we achieve herd immunity, which will occur when 20 million (or so) of us have had our shots. Our federal government is promising that every Canadian who wants a vaccine will have access to one by September, and that is also when it expects us to reach that goal.
If vaccination rates hold the key to our recovery, and if the BoC’s forecast is underpinned by our federal government’s planned vaccination timeline, then tracking actual vaccination rates relative to that timeline will provide us with a useful gauge of how our economic momentum is lining up with the Bank’s projections.
Last week the Bank of Canada (BoC) provided its latest assessment of the economic landscape both at home and abroad via its policy statement, Governor Macklem’s accompanying press conference, and the issuance of its latest Monetary Policy Report (MPR).
There had been speculation that the BoC might cut its policy rate, which our variable mortgage rates are priced on, but that didn’t happen. Nonetheless, the Bank did offer several valuable insights that are noteworthy for anyone keeping an eye on Canadian mortgage rates.
Here are my thoughts on five of the Bank’s key messages:
Today, mainstream economic forecasts fall within a fairly narrow band.
The narrative, in simple form, acknowledges that we’re in for a tough winter but predicts that we’ll be on our way back to normal not long after the snow melts, thanks to widespread vaccinations. After that, most forecasters expect our economy to rebound robustly and inflation to surge, as consumers unleash the cash they saved up during the lockdown.
In recent posts I have challenged several of the assumptions on which this view is built. Here is a summary of my key counter-arguments:
In last week’s post I offered my interest-rate forecast for the year ahead.
I contrasted our hope that vaccines will bring an end to the pandemic and breathe life into our economy with our fear that record-high infection rates and the reintroduction of lockdowns will inflict further economic damage in the interim.
Our latest jobs data, released last Friday, provided a snapshot of how COVID-19’s second wave has impacted employment. The picture wasn’t pretty.
We begin 2021 with our glasses half full – and that’s not just because our New Year’s celebrations were cancelled.
On the one hand, recently approved vaccines give us hope that we will beat the pandemic back and return to normal activities sometime this year. But on the other hand, spiking infection rates have necessitated the reintroduction of lockdown restrictions that will severely test our resolve over the near term.
Against that backdrop, and in keeping with my annual tradition, here is my interest-rate forecast for the year ahead.
I would like to wish my readers a healthy and happy holiday season.
I’ll be off until the new year. In the meantime, here are links to my recent blog posts that address five key mortgage questions:
- Is Another Bank of Canada Rate Cut on the Way?
- Have Canadian Mortgage Rates Bottomed?
- What Will Happen to Mortgage Rates When the Pandemic Ends?
- Should You Choose a Fixed- or Variable-Rate Mortgage? (Right Now It’s No Contest)
- When Will Canadian Mortgage Rates Rise?
When the Bank of Canada (BoC) slashed its policy rate from 1.75% to 0.25% in March, it said that it had reached its lower bound, which in central-bank parlance means the bottom of its range.
The Bank has confirmed many times since then that it has no plans to drop its policy rate into negative territory and that it would only consider doing so as a last resort.
But what about that last 0.25%? Have circumstances evolved to the point where the BoC might adjust its lower bound and drop its policy rate again?
The Bank’s commentary last week confirmed that this is a possibility.
This week’s post will offer my thoughts on five topics from last week that relate to Canadian mortgages and rates going forward.
- The Latest Employment Data
Last Friday Statistics Canada estimated that our economy added 62,000 new jobs in November, much higher than the consensus estimate of 20,000.
The market’s reaction to this upside surprise was muted, however, because the data only tracked results up to November 14, which means that most of the impact from recently introduced lockdown measures hasn’t yet been reflected in the numbers.
To wit, Manitoba introduced tighter restrictions on November 12 and despite a narrow overlap of only three days with Stats Can’s November data, that province showed a loss of nearly 18,000 jobs last month. This is being interpreted as an ominous sign for Ontario, which introduced tighter restrictions in the Toronto area on November 20.
Our latest employment results were welcome news, but previously stated concerns that spiking COVID infection rates will curtail our employment momentum still appear well founded.
There is a growing consensus that the pandemic will end sometime in mid- to late-2021 and that fixed mortgage rates will move higher relatively soon in anticipation of that outcome.
I respectfully disagree with both assumptions.
While I hope I’m wrong, I think the pandemic could continue for longer, and I don’t think fixed mortgage rates will bottom for some time yet.
To explain why, let’s start with an update on potential vaccines, and more importantly, projected vaccination rates.
Last week Prime Minister Trudeau told us to expect that an effective vaccine will become available in early 2021 and that “more than half of Canadians” will be vaccinated by next September.
Bluntly put, this sounds like wishful thinking.
Inflation spiked last month.
Statistics Canada confirmed that our Consumer Price Index (CPI) rose by 0.7% on a year-over-year basis in October. The increase was led by food prices and costs associated with housing construction, which rose at their fastest pace in fourteen years.
While last month’s result came in far above the consensus forecast of 0.4%, our overall CPI remains well below the Bank of Canada’s (BoC) target of 2%.
Two of the Bank’s three key sub-measures of core inflation also increased by 0.1% in October, with CPI-common rising to 1.6% and CPI-trim rising to 1.8%. CPI-median held steady at 1.9%.
In its latest Monetary Policy Report (MPR), the BoC had forecast inflation of only 0.2% for the third quarter of 2020, and as such, our latest inflation data have fueled speculation that the BoC may be forced to either raise its policy rate and/or curtail its quantitative easing programs sooner than expected.
Here are five reasons why I disagree with that view:
The five-year Government of Canada (GoC) bond yield recently surged higher, triggering warnings that our five-year fixed mortgage rates, which are priced on it, will soon rise.
A small run-up in five-year fixed rates may materialize, although it hasn’t yet, and anyone who is in the market for a fixed-rate mortgage would do well to lock in immediately to guard against that risk (which is pretty standard advice).
Short-term volatility aside, the more important question is: Have our mortgage rates now bottomed?