Ever wonder why your fixed mortgage rate can change daily, even when the Bank of Canada hasn't touched the overnight rate in months? The answer lies in the bond market. ## The Simple Version Fixed mortgage rates in Canada are closely tied to Government of Canada bond yields. When bonds become more expensive (yields drop), mortgage rates usually follow. When bonds get cheaper (yields rise), mortgage rates tend to increase. **Think of it like this:** - Banks borrow money cheaply in bond markets - They lend it to you as a mortgage at a slightly higher rate - When their borrowing costs change, your mortgage rate changes too ## Why Bonds Specifically? Mortgages and bonds share key characteristics: - Both have fixed terms (5 years most common) - Both involve lending money with interest - Both carry long-term interest rate risk for lenders This makes government bonds the perfect benchmark for mortgage pricing. ## Recent Example In early 2025: - Government of Canada 5-year bond yields fell from ~3.5% to ~2.8% - Banks' borrowing costs decreased - 5-year fixed mortgage rates dropped from ~4.5% to ~3.9% **Bond yield change: -0.70%** **Mortgage rate change: -0.60%** The small gap (~0.10%) represents the bank's profit margin and risk premium. ## What Moves Bond Yields? **Bond yields change based on:** 1. **Economic Expectations** - Slow growth = lower yields (rates likely to fall) - Strong growth = higher yields (rates likely to rise) 2. **Inflation Outlook** - Low inflation = lower yields - High inflation = higher yields 3. **Bank of Canada Policy** - Expected rate cuts = lower yields - Expected rate hikes = higher yields 4. **Global Factors** - US Federal Reserve decisions - International economic conditions - Geopolitical events ## Does This Mean Variable Isn't Linked to Bonds? Variable rates are different. They move directly with the Bank of Canada's overnight rate, not bond yields. This is why: - **Variable rates** = Bank of Canada overnight rate + lender margin - **Fixed rates** = Bond yields + lender margin + risk premium ## What Should You Watch? If you're waiting to lock in a rate, keep an eye on: 1. **Government of Canada 5-year bond yield** - Currently around 2.8% - Found on Bank of Canada website 2. **Economic headlines** - Recession fears → yields down → mortgage rates drop - Growth concerns → yields up → mortgage rates rise 3. **Bank of Canada announcements** - Rate-cut expectations pull yields (and fixed rates) down - Even before actual cuts happen ## The Bottom Line Fixed mortgage rates predict where the economy is heading, based on bond market expectations. Variable rates react to where we actually are, based on Bank of Canada decisions. Historically, variable rates have saved money over 5-year terms about 60% of the time. But fixed rates offer payment certainty that many homeowners value. **Neither is "better" - it depends on your risk tolerance and financial situation.**