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Interest rate news and analysis by Jeff Laberge
June 2, 2025 – The downward trend
Despite the fact that Government of Canada bond yields, which are the basis for fixed mortgage rates, have risen in recent weeks, the overall pattern is still downward trending.
As we can see in the chart, bond yields have risen to the resistance level of the trading channel, just as they had done several times in the past year as the yields follow their downward path.
May 1, 2025 - Bond yields bounce off previous lows
May 1, 2025 - Bond yields bounce off previous lows
May 1, 2025 - Bond yields bounce off previous lows
Government of Canada bond yields, which are the basis for fixed mortgage rates in Canada, continue to bounce off of previous lows, as you can see in the chart above. Bond traders and their trading software use previous highs and lows in charts to determine when to buy and sell to take profits or stop losses. This has to do with what is called "technical analysis" which uses chart patterns to forecast where prices/yields are headed, and the more traders that use these chart patterns, the more likely the price/yield will move in the anticipated direction.
When the yield hit the last previous low point, it coincided with a U.S. government bond sell off by countries opposed to U.S. tariffs which caused U.S. bonds to rise rapidly, bringing our bond yields up slightly with them.
May 1, 2025 - Bond yields bounce off previous lows
May 1, 2025 - Bond yields bounce off previous lows
Although our yields were pulled up by the sell off, as you can see in the second chart above, the spread between Canadian and U.S. bonds is growing larger with ours falling more rapidly than theirs due to higher inflation fears in the U.S. as a result of such high and broad tariffs.
May 1, 2025 - Bond yields bounce off previous lows
In the chart above, we can see the downward trend channel that Government of Canada bond yields have been traveling in. Just like previous lows and previous highs, trend channels which include an upper resistance line and a lower support line, are used by traders and the software that they use to determine where prices/yields are headed. The yields were actually about the breach the trend channel until the selloff of U.S. bonds had occurred.
Overall there are still major factors which point towards rates falling further:
1) The price of oil, which is the largest driver of inflation, has fallen almost 25% since it’s peak earlier this year.
2) A slowing of the Canadian economy will reduce spending, putting less upward pressure on prices
3) The main factor keeping inflation above 2% in Canada is the price of shelter, which is directly related to interest rates. Falling interest rates will relieve shelter costs and lead to lower inflation.
April 1, 2025 - The Journey of Fixed Rates - Pandemic to Present
The chart in this article illustrates the journey of government bond yields (and subsequently fixed rates) since the pandemic.
You can see in the chart the rates were at historic lows during the pandemic but as inflation rose, the yields rose as well. The Bank of Canada then began aggressively raising rates to bring down inflation, which had it's desired effect, causing the yields to stabilize somewhat, with the peak occurring in late 2023.
The yields have been coming down since the peak because inflation is now at the Bank of Canada's target rate.
When yields or stock prices follow a long term trend, it is never in a straight line and there are bounces along the way.
In the chart you will see "bounce 1" and "bounce 2". When prices, be it stock prices, bond prices, or bond yields, hit previous highs and lows where strong past changes of direction occurred, the prices/yields will reverse their trending direction momentarily as investors take profits and stop losses. This is because investors, as well as the computer-based trading systems they use, all use the same technical indicators (chart patterns) to determine when to expect changes of direction to occur.
Since they all use the same patterns to determine price direction, it is almost guaranteed that these patterns will occur since prices move in the direction of the majority of positions held (if there are more buyers, it goes up, and vice versa).
Eventually the yields should clear the previous low which caused "bounce 2", and they should continue to fall from that point onward leading to lower fixed mortgage rates.
