The Bank of Canada handed out an early holiday gift on December 11th with a much-anticipated 0.50% rate cut. If you have a variable-rate mortgage, you’re probably smiling as your rate just dipped. And if you’re in an adjustable-rate mortgage, your monthly payment joined the party. 

But here’s the twist: on the very same day the Bank of Canada lowered rates, bond yields spiked upward, almost as if they didn’t get the memo. In fact, bond yields have been climbing nearly every day since. 

So, what’s the deal? 

Rising bond yields shrink mortgage lenders’ profit margins, which can trigger fixed-rate mortgage hikes. While the Bank of Canada’s moves impact variable rates, fixed rates dance to the tune of bond yields. 

 

Why the Disconnect Between BoC Rate Cuts and Bond Yields?

This time, we can blame our noisy neighbors to the south. As the Bank of Canada announced its cut, the U.S. Bureau of Labor Statistics dropped its own bombshell: higher inflation in the United States. The Canadian 5-year bond yield promptly jumped by close to 2% on the same day and has been marching higher since. Compared to earlier this month, bond yields are now up about 7%. Fixed mortgage rates haven’t budged yet, but don’t hold your breath for any drops. If yields keep climbing, fixed-rate increases are just around the corner.

 

Canadian Inflation Down Again! 

Meanwhile, back in Canada, our own inflation report came out on December 17th confirming that inflation dipped below 2% in November. Thanks in part to… you guessed it, lower mortgage rates. 

The bond market’s reaction? 

A collective shrug. Yields barely flinched downward and rebounded by more than 3% on December 18th. 

 

US Cuts Rate by 0.25% and its Impact on Canadian Mortgage Rates

While the US federal reserve cut its rate by 0.25% on December 18th, as expected, they also indicated that it will probably only proceed with two more cuts by the end of 2025. As this is fewer cuts than what was originally expected, bond markets on both sides of the border responded with a sharp, upward spike. At the time of writing, bond yields are up almost 4.00%. 

It seems the bond market is more captivated by U.S. drama than by anything happening here. 

 

Will Fixed Rates Drop Below 3%?

In a word? 

Nope.

But could they dip into the high 3% range? 

Possibly. 

Could they climb higher, regardless of future Bank of Canada cuts? 

Possibly. 

If you’re banking on rate cuts, a variable-rate mortgage might be your golden ticket. But before you rush in, remember it’s not a one-size-fits-all solution. For more insight, check out my blogs:

 

What’s Next?

Canada’s big six banks are predicting additional Bank of Canada cuts ranging from 0.25% to 1.25% in 2025. I’ll be diving into what this means for the fixed vs. variable debate in an upcoming blog. Stay tuned!

 

Final Thoughts

When it comes to mortgage rates, predicting the future is like trying to predict the weather with a magic eight ball: “Outlook hazy.” Today’s forecasts are only as good as today’s data. 

And let’s not forget the wildcard: President-Elect Donald Trump. Whether it’s tariffs, tweets, or unpredictable policies, he’s capable of sending the bond market on a rollercoaster ride at a moment’s notice.

As always, time will tell, and anything can happen.