A significant drop in bond yields could spell relief for mortgage shoppers and those eyeing upcoming renewals next week. The 5-year Government of Canada bond yield has witnessed a dramatic decline, plummeting over 30 basis points to 3.79% this week, a drop of more than 60 bps from its recent peak of 4.42% in early October.

Industry experts anticipate that this reduction in bond yields should soon lead to some rate relief for fixed mortgages. However, it’s unlikely that these rate drops will match the full decline in yields.

According to Ron Butler from Butler Mortgage, “Fixed rates will start to fall next week, likely 20 to 40 bps over the next two weeks, depending on the term. The process is slow on the way down.”

Ryan Sims, a TMG The Mortgage Group broker and former investment banker, shares a similar perspective, noting that mortgage rates will decrease, but not to the extent they ideally should. He believes that lenders are likely to maintain risk premiums in their pricing, considering potential economic challenges.

The drop in bond yields is largely influenced by signals of a weakening economy, with a decrease in consumer spending, household credit growth, and employment data. This trend has impacted rate forecasts significantly, shifting market expectations from a 10% chance of a rate hike at the December 6 Bank of Canada meeting to a 7% chance of a rate cut. This data has brought predictions that the central bank could cut rates by March 2024.

Markets have adjusted their expectations, pricing in an 83% chance of a quarter-point rate cut by March 2024 and 81% odds of 50 bps cuts by June, revealing a lack of scenarios that foresee rate hikes.

Deputy BoC Governor Carolyn Rogers confirmed the possibility of rate cuts before inflation reaches its target rate of 2%. Testifying before the House of Commons finance committee, Rogers emphasized the importance of a forward-looking approach in monetary policy and the need for confidence in inflation easing before considering rate cuts. Despite the indicators, the bank has yet to make such a move.