If you’ve ever wondered why fixed mortgage rates move up and down, you’re not alone.
One of the biggest drivers is something most people never think about: the 5-year Canadian Government Bond Yield.
This is something I consistently post on my Instagram account to keep people understanding what’s happening in the market, and to help those variable people to know when to maybe lock in.
Here’s the easiest way to understand it — no finance degree needed.
________________________________________
1. What Is a Bond Yield, in Plain English?
Think of a bond like an “IOU” the government sells to investors.
• Investors give the government money today.
• The government promises to pay them back later, with a bit of interest.
The “yield” is basically the return (interest) investors earn.
When lots of investors buy these bonds → the price goes up → the yield goes down.
When fewer investors want them → the price drops → the yield goes up.
That’s it!
________________________________________
2. Why Do Mortgage Lenders Care About Bond Yields?
Lenders don’t guess when they set mortgage rates. They look at what it costs them to borrow money for a similar amount of time.
A 5-year fixed mortgage = money lent for 5 years
A 5-year government bond = money borrowed for 5 years
So lenders say:
“If it costs us X% to borrow money for 5 years, we need to charge the borrower a bit more to make a profit.”
This is why the 5-year bond yield is the backbone of 5-year fixed mortgage rates.
________________________________________
3. When Bond Yields Go Up → Fixed Mortgage Rates Go Up
Here’s the simple chain reaction:
1. Investors get worried about inflation or the economy.
2. They demand higher returns.
3. Bond yields go up.
4. Lenders’ costs go up.
5. Fixed mortgage rates go up.
This is why you sometimes see mortgage rates rise even when the Bank of Canada hasn’t changed its overnight rate.
Bond yields move every day. Mortgage rates often follow.
________________________________________
4. When Bond Yields Fall → Fixed Rates Fall
When there’s bad economic news or investors want safety:
• They pile into government bonds (safe investments).
• Bond prices go up.
• Bond yields drop.
• Lenders’ costs drop.
• Fixed mortgage rates start falling.
This is usually when you see headlines like “RATE RELIEF MAY BE COMING.”
________________________________________
5. Why the Spread Matters
Lenders typically add a “spread” (their profit margin) on top of the bond yield.
For example:
• If the 5-year bond yield is 3.00%,
• Lenders might set fixed mortgage rates around 4.79%–5.19%.
That spread changes based on competition, risk, and market conditions.
________________________________________
6. The Key Takeaway
You don’t need to watch the markets every day, but here’s what to remember:
• Bond yields rise → fixed mortgage rates likely rise.
• Bond yields fall → fixed mortgage rates likely fall.
• This relationship is much more important for fixed rates than the Bank of Canada’s interest rate.
If you ever see a headline that says “5-year bond yield surges,” you’ll know exactly what that means for your future mortgage.