Just two months ago, rates fell sharply as bond yields driven by concerns over U.S. tariffs.
Canada’s 5-year fixed mortgage rate is closely related to the country’s 5-year bond yield, which in turn is influenced by the US 10-year Treasury Department. This means that domestic mortgage rates are usually greater by global forces than local economic conditions.
“The bonds that affect Canada’s five-year government bonds aren’t necessarily what’s going on in Canada; in many cases, it’s the earnings of the U.S. Treasury Department for 10 years,” Bruno Valko, vice president of national sales at RMG told Canadian Mortgage Trends. “And there are a lot of things that will affect the United States for a decade.”
In early April, the U.S. Treasury Department dropped below 4% for 10 years, but is now returning above 4.5%. During this period, Canada’s 5-year bond yields also increased from about 2.50% lower today to 2.85% – fixed mortgage rates have gradually increased.
Rising bond yields have led some big banks to adjust their interest rates. CIBC and RBC respectively raised their five-year fixed interest rates by about 10 basis points, including high-ratio options. TD also hiked a term that raised its 3-year tax rate by 10 basis points and its 5-year fixed interest rate increased at 15 basis points.
Scotiabank, on the other hand, goes against this trend. It lowered its release of special rates and EHOME digital rates, with a higher margin of up to 90 basis points for its 1-year term, while the 2-year EHOME rate was 60 basis points.
What drives the bond and mortgage markets?
As mentioned above, many recent changes in Canadian mortgage rates have nothing to do with domestic data. Instead, it is driven by developments in the U.S. economy and how investors interpret them.
Valko believes that these factors can include some more obvious economic indicators, such as inflation, interest rates, employment and investor confidence in the economy.
For example, in the wake of reports of inflation cooling in the U.S. earlier this week, it has intensified speculation that tax rates have been cut later this year.
However, fiscal markets are also affected by less obvious factors such as investor confidence, the country’s deficit and concerns about “stagnation,” which happens when high inflation and stagnant economic growth coincide with high unemployment.
“The primary fear in the United States right now is the risk of stagnation,” Valko said. “I’m not saying scattering will happen, but there are some concerns that it can happen, and it hasn’t happened in the United States for 50 years.”
Unpredictable tariff policy-driven economic uncertainty could also lead to foreign buyers buying fewer U.S. treasury, which could boost yields.
“There are speculations that foreign countries are reducing their treasury purchases, but potentially buying gold,” Valko added. “If your treasury will have a decrease in customer base, especially a huge customer like China, it will increase yields because the Treasury needs to attract more buyers and may have to lower prices, which will increase yields.”
Another factor, Valko added, is that US Treasury bonds are about $7 trillion this year — a huge refinancing task that could put additional upward pressure on yields if demand is soft.
“These treasurys have to be refinancing and if you increase the supply, you may need to lower the price because buying all of these treasury bills may be reduced.”
What does this mean for Canadian mortgage holders
High levels of volatility south of the border mean that even the wisest predictions have some degree of uncertainty.
“[American Federal Reserve Chair] Jerome Powell is uncertain about interest rates because tariffs have an impact on growth and inflation,” Valko said. “So, when the Fed doesn’t necessarily determine interest rates, how do we determine your variable mortgage will be lower? ”
As a result, Valko recommends risk aversion mortgage buyers that can afford current interest rates to strongly consider 5-year fixed products and enjoy the peace of mind with a consistent payment schedule.
Meanwhile, Valko and others will watch some key indicators that will give a clearer understanding of Canadian banks’ interest rate policy decisions in the coming days and weeks.
“Next Tuesday is the most important day as we will look at our inflation numbers and [will see] This would be a problem if tariffs and retaliatory tariffs on the United States result in price increases. ” he said.
Inflation speculation
But Sal Guatieri, senior economist at BMO Capital Markets, does not expect to see a significantly higher number in next week’s inflation report.
“Inflation may be close to what it is now, which is close to the central bank’s 2% target this year and next year, and … Canada’s banks are likely to lower interest rates after the suspension in April,” he said in Toronto.
“We do hope it will resume lower rates in June and lower rates [a total of] Three times this year – the market matches our view – so this means variable mortgage rates may drop further. ” he added.
Ron Butler, of Butler’s mortgage, tends to agree, suggesting that Canadian borrowers are better off choosing more flexible and focus on the market as long as fixed rates keep rising.
“With interest rates already exceeding 4%, we can almost be sure that variable rates will continue to decline, whether on June 4 or the end of July, and variable cuts will start again,” he said.
He added: “At some point before the end of the year, we will be fixed back on a fixed rate for a third of the time, so if the opportunity arises, you can always lock in with the lender for free, and I think there is a chance.”
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Bond Earnings Bruno Valko Fixed Mortgage Rate Improves Fixed or Variable Ron Butler Sal Geatieri Treasury
Last modified: May 14, 2025
