On September 2nd, the Bank of Canada left its overnight rate unchanged. Many believe this means that fixed mortgage rates will also remain stable. But this is not accurate. 

Bond yields continue to trend upward, which is putting serious upward pressure on fixed mortgage rates. A few lenders have already increased and I would expect more to follow.

But why? 

Bond market investors are concerned, demanding more compensation for inflation risk, heavy government borrowing and growing global economic uncertainty.

In other words, the Bank of Canada can hold steady while the bond market looks further into the future. It continually reprices risk, which is currently pushing bond yields higher… and pushing fixed mortgage rates up with them. 

But this isn’t just a Canadian problem. Bond yields have been rising globally. 

 

Why are global bond yields rising?

Government bond markets around the world have been in a sell-off. In plain English, investors are selling off bonds because of the risks they see ahead.

Several factors are contributing to the sell-off:

  • Inflation risk: Higher energy prices and geopolitical uncertainty can push inflation expectations higher.
  • Heavy government borrowing: Governments are issuing large amounts of debt to fund spending and existing obligations. Some are accumulating extreme deficits. For example, the US national debt has now passed $40 trillion. More bonds entering the market can require higher yields to attract buyers.
  • Resilient economic growth: If economies continue growing better than expected, investors may believe interest rates will remain higher for longer.
  • Geopolitical uncertainty: Markets do not like uncertainty. Energy disruptions, trade tensions and international conflicts can all alter inflation and growth expectations.

While there are a combination of things contributing to rising bond yields, the biggest part of the issue is uncertainty and inflation concerns directly tied to the ongoing war in Iran. 

Even though Canada’s fiscal position is relatively stronger than some other major economies, rising bond yields are a global issue.

 

Why does a bond market sell-off push yields higher?

First, let’s clarify what a bond yield actually is.

When an investor purchases a bond from the government or corporation, they are essentially lending them money. The yield represents the annual return an investor would earn based on the bond’s current market price. 

Bond prices and bond yields always move in opposite directions. When investors sell off existing bonds, bond prices fall and yields rise. Conversely, when investors are purchasing bonds, the prices rise and yields fall. 

For example, let’s say you buy a bond for $1,000 with a fixed annual coupon rate of 5.00%. Your fixed annual return is $50: 

$1000 x 0.05 = $50

That $50 annual payout never changes. However, the market price of the bond fluctuates constantly based on economic conditions and prevailing interest rates.

If demand pushes the bond price UP to $1,100, your annual $50 payout now represents a smaller return relative to the higher price, dropping the current yield to 4.55%: 

$50 / $1,100 = 4.55% 

If a market sell-off drops the bond price DOWN to $900, that same $50 payout now represents a larger return relative to the lower price, driving the yield up to 5.56%: 

$50 / $900 = 5.56%

Bond price and yield example showing $1,100 producing a lower 4.55% yield and $900 producing a higher 5.56% yield, with a nationwide Canadian 3D bond-market infographic and PMT Mortgage branding

Simply put, a bond’s annual interest payment is locked in, but its market value isn’t. When market anxiety triggers a sell-off, prices fall, meaning new buyers can get the exact same fixed payout for a lower entry price. That higher return on a cheaper purchase is why bond market sell-offs automatically push yields up. 

 

How do bond yields impact fixed mortgage rates?

Lenders use Government of Canada bond yields to price their fixed-rate mortgages. When the relevant bond yield rises, lenders’ funding costs and required returns generally rise as well.

So, while bond prices and yields move inversely, fixed mortgage rates usually move with bond yields.

Bond prices falling while bond yields and Canadian fixed mortgage rates rise, with clear arrows explaining the relationship : 3D mortgage infographic

Bond yields are always moving and can change by the second. Fortunately, the yields simply act as a guide for lenders, which gives a bit more stability when pricing their mortgages. In other words, fixed mortgage rates do not move precisely in line with the bond yield. If the yields spike up, it doesn’t immediately result in a fixed rate increase… but it does put upward pressure on the rates. 

 

Are current fixed mortgage rates artificially low?

Mortgage lenders generally look for a spread of approximately 1% to 2% above the relevant Government of Canada bond yield when pricing fixed-rate mortgages.

With the 5-year bond yield around 3.50%, a more typical pricing range could be approximately:

  • 3.50% bond yield + 1.00% spread = 4.50%
  • 3.50% bond yield + 2.00% spread = 5.50%

Yet the lowest 5-year fixed mortgage rates are currently around 4.04% to 4.29%, depending on your exact situation. You can read more about the reason for the range in my blog on Why Different People are Quoted Different Rates. 

That means the spread is currently closer to approximately 0.54% to 0.79%, well below the usual 1% to 2% range.

In other words, fixed mortgage rates are artificially low relative to the bond yield. Lenders are accepting unusually thin margins.

You can read more about the mechanics in my detailed article explaining how fixed mortgage rates are priced.

 

Why would a lender accept a lower margin?

While a lender’s comfort zone is a spread of 1-2% above the bond yield, they will sometimes accept a thinner spread because:

  • Competition is intense: Banks, credit unions and other non-bank mortgage lenders are competing aggressively for qualified borrowers.
  • Market share matters: A lender may want to keep its lending volume flowing, even if each mortgage produces less immediate profit.
  • Rate holds create pipelines: Lenders may price aggressively today to build future business and manage their upcoming funding pipeline.
  • The yield increase may be temporary: If a lender believes bond yields will fall again, it may tolerate a narrow margin for a period.

That does not mean every lender has the same economics. It also does not mean rates must rise immediately.

But if bond yields remain elevated, or continue to rise, then lenders will be forced to increase their rates. They cannot absorb higher funding costs forever. 

 

What should borrowers do?

Whether you are buying, refinancing, or have a mortgage that is coming up for renewal within 120 days, and you’re looking for a fixed rate, then I would highly recommend getting a rate locked in ASAP.  This protects you if fixed rates rise before your closing or renewal date.

If the market reverses and fixed rates drop, then we can still get your rate lowered for you. At PMT Mortgage, we monitor rates for our clients right up until closing. If the rate drops, then we’ll get the rate dropped accordingly. This can be done right up until a few days before closing. There is the lowest rate now and then there is the lowest rate at closing. It’s the one at closing that is most important.

Even if another lender were to come out with a lower rate, we can even move you to the other lender, even if you have already signed. Don’t worry… we’ll make it happen for you, providing there is enough time to do so and still get your mortgage closed on time. 

 

Frequently Asked Questions

Can fixed mortgage rates rise if the Bank of Canada does nothing?

Yes. Fixed mortgage rates are influenced primarily by bond yields and other lender pricing factors. The overnight rate mainly affects prime and variable-rate mortgages.

What does a 1% to 2% spread mean?

It means lenders generally price a fixed mortgage approximately 1 to 2 percentage points above the relevant government bond yield. The spread covers funding costs, risk, operating expenses and profit.

Why are some 5-year fixed rates below the expected range?

Competition, rate holds, lender strategy and expectations of temporary yield movements can lead lenders to accept unusually thin margins. That pricing may not last if bond yields stay high.

Should I lock in a fixed mortgage rate now?

With fixed mortgage rates rising, locking in a rate now is the best way to protect yourself. This does not commit you… but it does guarantee you at least this rate. Otherwise, you may have no choice but to accept a higher rate. 

 

Final Thoughts

Canadian bond yields are rising because investors are demanding more compensation for inflation, government borrowing and global economic risk. That is creating upward pressure on fixed mortgage rates… regardless of the Bank of Canada holding its rate. 

The current 4.04% to 4.29% range for certain 5-year fixed mortgages looks unusually competitive beside a 5-year Government of Canada bond yield around 3.50%. Lenders are accepting thin margins, but they can only keep their rates at this level for so long if the yields remain elevated. 

If you are buying, refinancing or approaching renewal, speak with PMT Mortgage before you make a decision. We’ll help you compare the real options, understand the risks and create a strategy that sets you up for maximum savings long term.