Rising Bond Yields Send Shockwaves Through Canadian Mortgage Market

Bond yields are surging worldwide, affecting fixed mortgage rates and auto loans in Canada.

Ron Butler of Butler Mortgage Inc. explained that a bond is essentially an IOU from governments to investors, with promised interest payments and return of the original amount when the bond matures.

The bond yield is the return an investor can expect based on the current market price and its promised payments, which is different from the bond coupon's fixed interest payment. Government bonds serve as a benchmark for other interest rates, and the Bank of Canada notes that the five-year Government of Canada bond yield influences five-year fixed mortgage rates.

Butler stated, 'A bond yield, that is how we in Canada and all over the world, get mortgage rates, big banks use that as their guide.' As bond yields increase, lenders may raise fixed mortgage rates. However, Butler also noted that mortgage rates do not move exactly in step with bond yields, as lenders account for their own funding costs, risks, expenses, and profit margins.