Canadian Bond and Mortgage Rates are High
The Bank of Canada pushed bond and mortgage rates higher in 2022 and 2023 to dry up inflation caused by pandemic stimulus. Five-year fixed mortgage rates usually hover around 1.5% higher than the five-year government of Canada bond yield. The best ones are currently around 5.09%, but rates are forecast to decline 1-3% this year.
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Short-term interest rates have been higher than long-term rates for many months. This unusual situation is called an "inverted yield curve" and frequently precedes a recession. The US is also facing an inverted yield curve, but it is much less inverted than Canada's, which gives them better odds of avoiding recession.
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For Investors
Bond funds have performed poorly over the last ten years, but now may be a good time to increase bond fund exposure for two reasons:
Higher potential gains - bond values go up when rates go down.
Lower Risk - Rate hikes have a smaller impact on bonds starting from these levels.
Home Buyers and Mortgage Holders
Generally speaking, the best time to buy a house is when you are ready! There is a chance that home prices will rise quickly if mortgage rates fall sharply later this year. But variable-rate mortgages are very expensive at around 6.2%. If bond and mortgage rates drop sharply as predicted, variable-rate mortgages may redeem themselves. But interest rates are impossible to predict. Every mortgage borrower must choose between a variable rate in the low 6% range vs. a five-year fixed rate in the low 5% range.
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