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Bond yields plummet to 11-month low on banking crisis fears

Your Mortgage Memo news for the week of March 24, 2023

Memo 1: Bond yields down following banking sector fears

This week has been filled with not-so-great news for financial markets – but with economic unease comes a silver lining for mortgage borrowers in the form of dropping bond yields. 

Government of Canada yields – in tandem with US treasury bonds – have absorbed historic plummets over the last two weeks, as investors, spurred by growing banking instability fears, have flocked to safe haven assets.

The five-year yield has now hit a low not seen since last April at 2.72%, shaving off nearly 85 basis points in the last four weeks, and down 15 bps over the past five days alone. Two-year yields have slid even further, down 91.3 bps and 18 bps, respectively.  

As these yields largely influence funding costs for consumer banks, that’s translated into lower fixed mortgage rates from some lenders this week; as of today, the lowest five-year fixed rate sits at 4.44%, with 5.49% and 4.84% offered for two- and three-year terms. That’s providing some much-needed relief for anyone who’s been on the hunt for a new rate as of late, or is coming up for renewal; while still steeply above last year’s pricing by about 2%, any fixed-rate discounting takes some pressure off those facing qualification, reducing the mortgage stress test threshold back to a range of 6 - 7%.

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Memo 2: Banking turmoil forces smaller hike from US Federal Reserve

On Thursday, the US Federal Reserve made its latest move in its fight against inflation, upping its Federal Funds Rate by 0.25% to a range of 4.75 - 5%. But that increase is a step back from the half-point hike that was widely expected as recently as a month ago, reflecting just how rapidly the rate narrative has shifted on growing fears in the banking sector.

Before the defaults of Silicon Valley Bank and Signature Banks (and hasty buyout of global investment giant Credit Suisse), the Fed had strongly telegraphed that it would need to aggressively pursue its hiking cycle, as inflation remains persistently high. But that unwound rapidly last week as turmoil took root in the banking system, prompting regulators to step in, and policymakers to reassure the public that funds remained safe. 

The Fed took the opportunity to further calm markets in its policy statement, writing, “The US banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.”

While the Fed is keeping the door open to “some additional policy firming” if necessary, what they’re saying here is that the resulting credit tightening from the global banking insecurities is actually doing part of their job for them in terms of quelling consumption, meaning they can ease up on the rate pedal slightly, and with less conviction of further rate hikes than previously communicated.

The US Fed taking a beat on rates in turns eases pressure on the Bank of Canada; while our central bank had already committed to holding its Overnight Lending Rate for the foreseeable future – ushering in a period of stability for variable-rate mortgage costs – they can now do so with less worry of softening the Canadian dollar.


Memo 3: Another win in the fight against inflation

The latter will come in particularly useful for the BoC, as the latest crop of inflation numbers show Canada’s consumer price index is indeed trending lower as hoped, and wiping any chance of another BoC rate hike off the table. According to Statistics Canada’s report, CPI clocked in at an annual growth rate of 5.2% in February, down from 5.9% recorded in January. That’s below the forecasted reading of 5.4%, and marks the measure’s largest dip since April 2020. 

The drop can largely be attributed to lower energy costs; consumers will still be hard-pressed for relief at the grocery store as food costs continued to rise 10.6% year over year. Excluding food and energy costs, the core inflation measure came in at 4.8%, just shy of January’s 4.9%, and reflecting prices continue to be resistant to downward consumption pressure.

The bottom line

While there are small signs of rate relief on the horizon, the economic environment remains quite volatile. The narrative can shift rapidly, as more information about the banking sector’s stability comes to light, which central banks and monetary policy makers will be watching like hawks. If you’re shopping for a mortgage rate, or are wondering whether you should switch up your current term and product, it’s a great idea to connect with a mortgage broker, who can help you assess where today’s rates currently stand, and the best fit for your personal financial situation and risk tolerance.

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