Mortgage rates are on a knife edge and will follow bond yields one way or the other

Canada’s fixed mortgage rates are sitting in a fragile spot, closely tied to government bond yields. Right now, lenders are waiting to see which way bond yields move before adjusting rates. If the five-year bond yield climbs above around 3 percent and stays there, even the lowest fixed mortgage rates could increase. This has added tension to an already uncertain housing market.

Fixed mortgage rates usually move in step with government bond yields. When bond yields rise, it becomes more expensive for lenders to borrow money, so they raise mortgage rates. When bond yields drop, fixed rates can come down too, although lenders often delay those changes. Their goal is to protect themselves from market risks.

Lenders are quick to raise fixed rates when bond yields go up but slower to lower them when yields drop. This cautious approach gives them a buffer against future losses. It also makes it harder for homeowners to predict what will happen with their mortgage payments.

Bond yields themselves are affected by several factors, including inflation, trade issues, and the global economy. Recently, Canada’s five-year bond yield has stayed near 2.9 percent due to weak economic growth, rising U.S. inflation, and changes to import rules. These pressures push yields higher and help explain why fixed mortgage rates have not fallen as expected.

Some forecasts suggest that fixed mortgage rates could stay between 4.0 percent and 4.6 percent into 2025. Any drop will depend on whether inflation cools and bond yields go lower. Until then, banks and lenders will keep watching bond markets closely and could change rates with little notice.

For homeowners and buyers, this means keeping a close eye on rate trends. Mortgage rates may swing either way, and choosing when to lock in a rate could save or cost thousands. Watching bond yields gives a rough clue about what might come next for mortgage rates.