Is the Bank of Canada Primed to Reduce their key overnight rate December 11th and what does that mean for Fixed Mortgage Rates?

You’ve heard the headlines: “The Bank of Canada adjusts its overnight rate!” Many Canadians believe these announcements dictate all mortgage rates. But here’s the surprise—fixed mortgage rates don’t wait for the Bank of Canada. In fact, they often move in advance of any official decision. Understanding why this happens—and how government bonds come into play—could save you thousands when renewing or securing a mortgage.

How Fixed Mortgage Rates Are Determined

Fixed mortgage rates are tied to the 5-year Government of Canada bond yield, which lenders use as a benchmark for their funding costs. These bonds are loans that the federal government issues to investors to fund spending or manage debt. In return, bondholders earn interest, known as the bond yield.

When demand for government bonds is high, yields drop because the government can offer lower returns. Conversely, when demand is low, yields rise as higher returns are needed to attract investors. Fixed mortgage rates closely follow these bond yield movements.

What Drives Bond Yields—and Fixed Rates

Bond yields are influenced by several key factors:

Inflation Expectations: Rising inflation erodes the value of returns, so investors demand higher yields, pushing fixed rates higher.

Economic Growth: Strong economic performance, such as robust GDP growth or low unemployment, signals potential rate hikes, causing bond yields—and fixed rates—to rise.

Government Bond Supply: When the federal government issues more bonds to fund spending, an oversupply can push yields higher if investor demand doesn’t keep pace.

Global Trends: Canadian bond yields often follow U.S. Treasury yields or shift due to global economic and geopolitical events.

Since bond markets react immediately to these factors, fixed mortgage rates frequently rise or fall in anticipation of BoC decisions.

Why Fixed Rates Move Before the BoC Acts

The bond market operates on expectations. For instance, if investors believe the BoC will raise rates to combat inflation, bond yields rise ahead of the announcement, prompting lenders to increase fixed rates preemptively. Similarly, global or domestic economic trends—such as rising U.S. yields or new government spending—can push bond yields higher, influencing fixed rates even without BoC action.

What This Means for Borrowers

Understanding how fixed rates are determined helps you plan better:

Track Bond Yields: The 5-year Government of Canada bond yield is a good predictor of fixed mortgage rate trends.

Act Early: Lock in a rate hold with your lender 60 to 120 days before your renewal or purchase. This protects you if rates rise while giving flexibility if they drop.

Know the Difference: Fixed rates follow bond yields, while variable rates are directly tied to the BoC’s overnight rate. Choose based on your financial goals and the economic outlook.

The Bottom Line

Fixed mortgage rates are driven by the bond market, not the Bank of Canada’s overnight rate. Since bond yields respond quickly to economic expectations, fixed rates often rise or fall well before any BoC announcement.

By monitoring bond yields and acting strategically, you can secure the best possible rate for your mortgage. Partnering with a mortgage broker can provide you with expert insights and help you navigate these market dynamics with confidence.