The ripple effects of the coronavirus are being felt on Canada’s bond market, which is translating into lower mortgage rates.
Variable-rate mortgages are generally tied to the Bank of Canada’s overnight benchmark rate. Their fixed-rate counterparts depend on the five-year Government of Canada bond yield, which fluctuates with market forces. It’s fallen sharply since the coronavirus first surfaced.
When investors are fearful about global events and an economic slowdown, they tend to buy more government-backed bonds, often called safe-haven assets. This leads to something of a seesaw effect.
When investors rush to buy bonds, bond prices go up, which pushes down bond yields. Lower bond yields drive down fixed-mortgage funding costs for lenders.
Lenders then typically pass through those savings to borrowers.
Five-year fixed mortgage rates could drop at least 15 basis points (bps) from here. In other words, a typical uninsured mortgage would cost you 2.69 per cent instead of 2.84 per cent today.
RBC cut its discounted special offer and discretionary rates, but hasn’t cut its posted rate.
Fixed-rates fell slightly during the SARS outbreak, but there are already comparatively more confirmed cases of the coronavirus for the stage of the outbreak and airlines are already cancelling flights.
Scotiabank says industries tied to commodity prices and travel would feel it the most.
Bank of Canada is likely unfazed by the situation, which means variable-rate mortgages won’t be going down in the near future.
Given the movement that has already taken place in medium-term yields, I would not expect a cut in the overnight rate target by the Bank of Canada to set off a substantial change in medium-term rates that would spur an increase in new borrowing by households.