Canada's Mortgage Market Tightens Despite Stable Overnight Rate

Canada's mortgage market is tightening despite the Bank of Canada holding its overnight rate at 2.25%. This shift can be seen in government bonds, where the benchmark five-year yield has increased from 3.14% on July 15 to 3.44% on September 8, a 30-basis-point move.

This repricing can lead to higher fixed mortgage offers and renewal costs, affecting banks such as Royal Bank of Canada, Toronto-Dominion, Bank of Montreal, Bank of Nova Scotia, and CIBC. However, the benefits may be offset by slower mortgage volumes, more expensive wholesale funding, and rising borrower stress.

Investors should watch asset yields improve faster than funding costs and credit provisions. The next earnings test will determine whether this is possible.