After the short-term rise in bond yields last month that pushed some fixed mortgage rates up, lenders have started cutting them again.

As we mentioned earlier, the increase of more than 40 basis points in Canadian government bond yields in January caused some mortgage providers to pause the decline in interest rates temporarily, and in some cases, raise them slightly.

But as of this week, most providers have returned to lowering their quotes, including interest rate cuts by Scotiabank, TD, and CIBC, resulting in interest rate reductions of 10-20 basis points.

According to MortgageLogic.news, the national average fixed rate available for five years is 5.07%, which is lower than 5.82% in October.

Interest rates will continue to trend downward

While shoppers should expect some price volatility in the future, experts say the overall trend should continue downward.

Ron Butler of Butler Mortgage told CMT, "These price movements are not linear; there will be many bumps along the way, but the overall trend will be downward."

He added, "The ongoing consensus is that the rise in interest rates is over for the major central banks, and now the focus is on the timing and speed of cuts."

Former mortgage broker and investment banker Ryan Sims attributes the resumption of fixed rate cuts to lenders trying to catch up with the sharp decline in yields we have seen in recent months.

He said, "Banks are taking a slow and methodical approach to lowering interest rates from yields, so we are seeing some switches back and forth," "I think there is a lot of bad news related to yields right now, and while we are getting data suggesting things may not be as bad as we think, that will cause some ebb and flow in yields."

He also said, "As a result, we expect continued volatility in both yields and fixed mortgage rates in the near term as more economic data is released."

Canadian yields were heavily influenced by the United States

Despite generally weak economic data in Canada, bond yields rose last month largely due to the rise in U.S. Treasury bonds.

Bruno Falco, National Sales VP at RMG, noted in a recent subscriber memo, "Canadian 5-year government bonds are influenced by the United States," "and the direction of 10-year Treasury yields also guides the 5-year bonds in Canada."

But recent movements in yields have been volatile given the sometimes conflicting and unsettled economic data in both countries.

In the U.S., initial jobless claims were higher than expected on Thursday, ADP payroll numbers were lower than expected, and regional banks reported some "painful" losses in commercial lending.

However, on Friday, U.S. January employment numbers surpassed expectations, rising by 353,000 jobs versus expectations of 185,000. December results were sharply revised up to 333,000.

Falco said, "Yields have risen again," "It's a volatile ride, it's hard to predict the future because the fluctuations are massive."

Interest rate cut expectations fluctuate

Although the consensus is leaning toward interest rate cuts over the year, the U.S. employment figures released last week in particular pushed markets to scale back their rate cut expectations.

Sims pointed out that "the most interesting part for me is the near-immediate revision of the Federal Reserve's schedule for the remainder of 2024."

Markets shifted from expecting six quarter-point rate cuts by the Fed in 2024 to four after the employment figures, and they also revised the timing of the first rate cut from March to June.

Sims said, "Since Canada follows the U.S., expect revisions to the Bank of Canada's schedule as well."

Central bank governors resist rate cut expectations

Central bank governors on both sides of the border have been resisting the markets' increasingly aggressive expectations for rate cuts.

After the Federal Reserve decided last week to hold interest rates steady, Chair Jerome Powell said it is unlikely the central bank will start cutting rates by March as it awaits more evidence that inflation is returning to target.

Similarly, Bank of Canada Governor Tiff Macklem said last week before the House of Commons Finance Committee that although monetary policy deliberations have shifted from "whether monetary policy is sufficiently restrictive, to when the current restrictive stance will be maintained," he said the Bank must also be cautious not to start cutting rates prematurely.

He said, "We have made a lot of progress (in lowering inflation) and we need to finish the job."

Before considering rate cuts, Macklem said the Bank's Governing Council wants to see continued easing in core inflation and be sure that inflation is on track to the neutral 2% target.

He added, "You don’t want to cut rates until you are convinced ... that you are really on the path to achieve 2% inflation, which is where we are now."

The forecasts of Canada's Big Six banks still indicate a return of the Bank of Canada's overnight target rate to at least 4.00% by the end of this year, which is one full percentage point lower than its current level, with both TD and CIBC expecting the Bank to cut rates further to 3.50% by year-end.