The 5 Year Yield

by JDH on September 23, 2023

Let’s start with a scary chart, and then look at an even scarier chart.  Here’s the Canada 5 Year Government Bond Yield, going back to 1995:

As you can see, the yield is now at just over 4.2%, the highest level since November 2007.

Remember what happened in 2008?  Scary, eh.

Let’s zoom in for an even scarier look:

On March 24, 2023 the 5 year risk free government bond yield was 2.66%.  Today it’s 4.20%.  That’s around 60% higher.

The yield is 20 basis points higher just this week.

So why is this scary?  Because the 5-year yield is what determines 5 year residential mortgage rates, and, by extension, all mortgage rates in Canada.

5 year mortgage rates tend to be about 100 to 120 basis points higher than the 5-year government bond rate, so they are now around 5.3%, and heading higher.  A 5 year variable rate is 5.9%, so clearly the lenders expect rates to continue to go higher.

That’s not good, if you are a borrower.  Costs are going up.

But here’s the key: there’s a time lag.  Interest rates have increased from virtually zero to over 5% since March 2022, but the world has not ended.  Why?  Because of the time lag.  If you locked in your 5 year mortgage three years ago, nothing has changed for you.


But when you renew, you get a big shock, and that’s when you have to decide whether or not to sell your home and downsize, or deplete your savings, or make budget cuts in other areas.

Bottom line: spending drops, and that’s when the recession is obvious.

Govern yourself accordingly.  We are only in the early innings of this mess (so I am not leveraging up on overpriced stocks; cash is king, for now).

See you next week.