Bond Market Sell-Off Hits Canadian Consumers with Higher Mortgage Rates

The global bond market is experiencing a steep sell-off, causing waves for consumers and investors. Canadian consumers can expect higher mortgage rates as the Bank of Canada's trend-setting interest rates are expected to rise due to inflation fears and ballooning government debt.

When you buy a bond, you're effectively lending money for a predetermined amount of time to the issuer. The bond yield is the annual return an investor earns from holding a bond, expressed as a percentage. As central banks raise interest rates, newly issued bonds offer higher payouts, making existing lower-paying bonds less valuable.

Canada's 10-year government bond yield hit a two-year high on September 2 after the Bank of Canada signalled inflation risks are rising. The higher yields for those bonds mean that Canadian banks will set their interest rates for fixed-rate mortgages and auto loans accordingly, resulting in higher borrowing costs for consumers.

However, the rising bond yields also force banks to raise their GIC (Guaranteed Investment Certificate) rates to stay competitive, boosting guaranteed returns. Bank of Canada Governor Tiff Macklem stated that 'central banks' tolerance for higher inflation is limited,' and that the market is building in the possibility of future interest rate hikes.