Bond traders take refuge after latest jobs update

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Canada’s most crucial economic report this side of the Consumer Price Index (CPI) landed on Friday morning. What we saw were unemployment numbers that scared the bejeebers out of bond traders. When these financial veterans smell economic trouble, they dive into government bonds like they’re life rafts. This mad dash sends bond prices up and longer term interest rates down.

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As this is being written, Canada’s five year government yield is slumping to a nine week low. That should trigger some near term fixed-rate cutting, especially for default insured rates which adapt more quickly to funding cost changes in the bond market.

Mind you, the big banks that bankroll most of the mortgages in this country have become a bit more margin obsessed as of late. Heading into what’s traditionally the slowest time of the mortgage year, they’re looking to offset declining lower flow with higher margins per loan.

That’s especially true for floating rate mortgages, which are suddenly hotter than a vinyl summer jumpsuit. The Bank of Canada‘s rate easing next week should amp up that demand even more. Variable rate interest is another reason why some lenders have been quietly shrinking their discounts from prime rate.

The net effect is that central bank cuts will deliver slightly less savings to folks signing up for new variable rate mortgages.

If you’re already riding the floating rate wave, the news is all good. You’re about to save 25 to 50 basis points on your mortgage. Derivatives pricing in the bond market suggests there’s a better than three in four chance of the latter.

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“With slack continuing to build in the labour market, GDP growing at a soft below-potential pace, and inflation at the two per cent target, we expect the Bank of Canada will push ahead with another 50 basis point rate cut next week,” said Oxford Economics economist, Michael Davenport in a report Friday. That would be the second supersized rate cut in a row for our central bank, which has lowered rates more than any other G7 nation.

A half pointer would shave somewhere around $120 per month off the average floating rate mortgagor’s interest bill, depending on what kind of loan they have. Multiply that across millions of mortgages and suddenly our economy has more stimulus than a Red Bull factory.

More consumer spending means a higher probability of inflation bottoming out sooner and less chance the central bank needs to cut as much next year. That’s not to mention the gas Trump is expected to throw on U.S. growth, which could indirectly help our struggling economy — assuming Team Trudeau can sweet talk the incoming president out of painful Canadian tariffs.

On the fixed mortgage side, rising joblessness and falling yields mean the pressure is off rates in the near term. The next fireworks come on Wednesday. That’s when traders see the all-important U.S. CPI report, and get to dissect Bank of Canada governor Tiff Macklem’s forward rate hints.

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If we strip away all this market drama and just look at forward rate data from CanDeal DNA, it continues to suggest 100 to 125 basis points of central bank rate cuts from here. If that outlook proves true, it favours variable and three-year fixed mortgage rates the most. And wouldn’t you know it, borrowers are already piling into these terms like they’ve got insider information.

Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister. 

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