Government bonds have taken a beating around the globe – with the exception of Canadian bonds, which not only have weathered the sell-off panic, but continue to be in high demand. It seems Canada’s “safe haven” status is still recognized by investors, despite economic rumblings of lower oil prices and ballooning housing market.
It’s good news for fixed mortgage borrowers: as Canadian bond demand keeps yields low, lenders are given additional room to discount their fixed mortgage products. But uncertainty around rates remains, especially as it’s predicted the U.S. Federal Reserve may raise their own rates as early as the end of this year. Doing so would prompt our central bank to follow suit, and will likely impact the bond market.
Also read: How Bond Yields Affect Fixed Mortgage Rates>
Huge Foreign Interest
The numbers tell the story. During the first four months of 2015, investors outside of Canada bought $22.9 billion in federal bonds. According to data, which first started being collected in 1998, this is the most significant inflow of money into Canadian bonds – ever. It’s a big change from 2014 and 2013 when investors sold more Canadian debt then they bought, especially last year, as the threat of plunging oil prices scared investors. However, the Canadian economy has shown tremendous resilience despite the loss is value of one of our most important resources, which is encouraging to bond investors.
Leading the Group of 7 Nations
Canadian bonds are performing better than any other in the G-7, which includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. These are considered the world’s most advanced economies. Canadian government bonds have returned 1.3 per cent in 2015, compared to losses in every other G-7 nation, according to data compiled by the Bank of America Merrill Lynch. There’s also renewed confidence in Canadian bonds as it’s not anticipated the Bank of Canada will raise central rates again this year. In fact, the Bank’s January interest rate cut increased the value of existing Canadian bonds. This move helped attract investors back into Canadian debt instruments.
Also read: The Ups and Downs of Fixed Mortgage Rates>
The Impact on Mortgage Rates in Canada
As most homeowners have noticed, fixed rates have been at rock bottom since our central Bank lowered rates in January. In some cases, fixed rates are being offered as low as 2.49 per cent on a five-year term. If the interest in bonds remains and the central bank keep rates low, homeowners could be seeing these low rates stable for at least the remainder of 2015. The only caveat is if the U.S. Federal Reserve were to raise rates at the end of 2015, as it’s widely expect to. In that case, the Bank of Canada may be forced for follow in step, thus ending the low fixed rates Canadians have been enjoying recently.