Bond Prices, Bond Yields & Fixed Mortgage Rates Explained

Have you ever wondered why fixed mortgage rates can go up, even when the Bank of Canada hasn't raised interest rates? The answer might surprise you. It's all connected to the bond market. First, what's a government bond? Think of it as lending money to the government. In return, the government promises scheduled interest payments and repayment of the bond's face value at maturity. But here's the key: bond prices and bond yields move in opposite directions. Here's a simple example. Imagine a bond that pays fifty dollars a year. At a price of one thousand dollars, that payment represents five percent of the purchase price. But suppose investors are willing to pay twelve hundred dollars for the same bond. The annual payment is still fifty dollars. Now that's only about four-point-two percent of the price. The bond became more expensive, but its current yield fell. Now, here's the mortgage connection. Canadian lenders look at bond yields as an important benchmark when pricing fixed mortgages. For example, five-year Government of Canada bond yields strongly influence five-year fixed mortgage pricing. When bond yields rise, fixed mortgage rates often rise too. And when yields fall, mortgage rates may follow. Here's another important distinction. Variable mortgage rates are more directly influenced by lender prime rates, which generally move with the Bank of Canada's policy rate. Fixed rates, however, are more closely tied to bond-market conditions and expectations about inflation and future interest rates. That's why fixed rates can move before the Bank of Canada makes its next announcement. So remember: when bond prices rise, yields fall. When bond yields fall, fixed mortgage rates may follow. And fixed rates can change without a Bank of Canada rate announcement. Understanding what drives mortgage rates can help you make more informed decisions. Alberta Mortgage Solution — making your mortgage journey easier to understand.