Definition
The yield on 5-year Government of Canada bonds (GoC 5-year) is the market benchmark banks use to calibrate their fixed mortgage rates. The logic is straightforward: a bank offering a 5-year fixed rate must hedge this rate risk in the bond market. If 5-year bonds yield 3.5%, the bank cannot offer a lower mortgage rate.
Historically, the 5-year fixed mortgage rate sits approximately 1.00% to 2.00% above the GoC 5-year bond yield (the spread represents the profit margin and borrower credit risk).
For a buyer negotiating a fixed rate, monitoring bond yields allows anticipation of whether mortgage rates will rise or fall in the coming weeks. A bond yield spike (e.g., economic announcement, inflation surge) often precedes a fixed mortgage rate increase by 2 to 4 weeks.