It’s no secret that Canadian fixed mortgage rates are closely tied to Government of Canada (GoC) bond yields—and lately, those yields have been on a wild ride. What’s driving the volatility? Oddly enough, much of it stems from south of the border, thanks to U.S. President Donald Trump’s unpredictable tariff policies.
The Tariff Effect: Why Canadian Bond Yields React to U.S. News
Investors in Canadian bonds are constantly trying to predict the long-term economic impact of tariffs—how inflation will respond, how business confidence will shift, and what it means for growth. To do this, they rely heavily on U.S. economic indicators, because if the American economy weakens, pressure will mount on Trump to ease tariffs. If the U.S. remains resilient, he’ll likely stay the course. That’s bad news for Canada, which typically suffers collateral damage from prolonged trade disruptions.
U.S. GDP Q1 2025: A Shrinking Economy
On Wednesday, we learned that the U.S. economy contracted by 0.3% (annualized) in Q1—its first dip in three years. Most of that drop came from a spike in imports, as businesses stockpiled inventory ahead of Trump’s new tariff deadline. When demand is pulled forward like this, future quarters often show a slump.
It’s worth noting that these numbers don’t yet reflect the impact of the tariffs themselves, which were announced on April 2. The true fallout will begin to surface in the next few months.
U.S. Jobs Report: Solid, But With Caveats
On Friday, we saw April’s U.S. jobs data: 177,000 new jobs, better than expected. The unemployment rate held at 4.2%, and wages kept rising at 3.8% annually. But keep in mind, this data was captured only two weeks after the tariffs were announced—too soon for any real impact to show up.
Also, payroll data in the U.S. relies on historical estimates to fill in gaps. These “statistical plugs” can mask early signs of downturns. In fact, job estimates for February and March were revised down by a combined 58,000—another potential red flag.
What This Means for Canadian Mortgage Rates
Canadian GoC bond yields mirrored their U.S. counterparts last week: they dipped Wednesday with the GDP data, then climbed again Friday with the jobs numbers. In the end, yields settled a little lower—but not enough to move the needle on fixed mortgage rates.
That said, economic uncertainty has widened credit spreads, increasing lender funding costs. As a result, banks have been reducing discounts on variable-rate mortgages. Those discounts held steady last week, but I don’t expect them to improve anytime soon.
Looking Ahead: More Rate Cuts Are Likely
I expect the Bank of Canada to cut its policy rate further in 2025. We’re currently sitting at 2.75%, but I believe we’ll hit 2.00% or even lower before the year is out. If that happens, variable rates will follow suit—something for today’s borrowers to keep in mind.
Need Personalized Advice?
If you’re weighing your fixed vs. variable options, reach out to me directly. Let’s talk about the best strategy for your specific situation.
