A cut to the Bank of Canada’s key lending rate today might provide relief to homeowners with variable rates facing mortgage renewals. But why do they get to have all the fun? Below, we form bonds with fixed-rate borrowers and prep for our next mortgage meeting with the bank. (And you can follow our coverage of this morning’s announcement live here.)
Up top
- Wildfires: Alberta oil-sands operations are on high alert. Emma Graney reports some are reducing staff to only essential workers as fires continue around Fort McMurray, where the bulk of oil-sands operations are located. More than 170 fires were burning across the province. In Jasper, police are going door to door to make sure residents have fled west as fires moved closer.
- Buyback: The Caisse de dépôt et placement du Québec is selling a $700-million stake in Alimentation Couche-Tard Inc. back to the Canadian convenience store giant through a private share buyback agreement, James Bradshaw reports. The Caisse is at the centre of a debate over whether Canada’s pension plans invest enough of their vast assets at home.
- Layoffs: Artificial-intelligence company Cohere Inc. has laid off around 20 employees, Joe Castaldo reports. The move comes one day after the Toronto company announced the close of a financing round that valued it at US$5.5-billion. A company spokesperson said that with the funding, “we have a clear vision for the future of Cohere, which has required some internal realignment.”
- Liftoff: Quebec is injecting yet money into a manufacturing partnership with Airbus SE on the A220 jet, Nicolas Van Praet writes. The European plane giant continues to grapple with supply chain disruptions and labour troubles that are hobbling its aircraft manufacturing globally.
Legault: Let's go! Quebec Premier François Legault takes flight (in a simulator) at the Airbus A220 manufacturing facility in Mirabel, Que.Ryan Remiorz/The Canadian Press
Economy
How bonds yield returns and reflections on Canada’s outlook
We talk a lot about how a cut to the overnight lending rate would affect homeowners with variable rates and mortgage renewals on the horizon. But what about fixed rates, which are tied to bond yields? I asked Rob Carrick about how those deals are affected by this morning’s Bank of Canada announcement.
First off, how are fixed-rate mortgages set?
Fixed-rate mortgages are guided by bond yields and competitive considerations among banks and other lenders. Also, whether or not banks want to be aggressive in attracting business, at the cost of revenue from higher rates.
Can you explain the relationship between bond yields and interest rates?
Bond yields reflect the sum and total thinking in financial markets about inflation and the path interest rates are on. Included among the things the bond market reacts to are changes in the Bank of Canada’s overnight rate. That said, bond yields don’t fall in line with the overnight rate. Bond yields tend to discount changes in the overnight rate ahead of time, kind of like stock prices anticipate events before they happen.
I would say a lower overnight rate means lower rates for variable rate mortgages, done deal and end of story. A lower overnight rate also helps pave the way for lower fixed rates, but not in a direct or immediate way.
What does the bond market tell us about the health and direction of Canada’s economy?
Rising rates, as in a steadily rising overnight rate, would depress bond prices because the interest rate on existing bonds looks less attractive. Falling rates have the opposite effect – existing bonds look more appealing. Right now, the bond market seems to be slowly absorbing the idea of lower inflation and interest rates. If there are signs of recession, expect bond yields to decline at a faster pace.
What happens in the event of a cut tomorrow for both variable and fixed rates?
I would say a lower overnight rate means lower rates for variable rate mortgages, done deal and end of story. A lower overnight rate also helps pave the way for lower fixed rates, but not in a direct or immediate way.
Say I’ve been following the news and have predictions the central bank will cut its benchmark rate even more over the course of the year. What does this mean when I walk into my bank’s office to negotiate?
The slowing economy means lenders are getting very thorough and tough in evaluating mortgage and other lending applications. You need a good credit score, with solid job and income security. If you have all of those, you can try playing your bank off against deals available through a mortgage broker. Doing a lot of business with a bank definitely helps, but there are no guarantees of getting the best possible rate as a result of your loyalty.
🎧 A new home? A career change? A baby? In this economy? It can all feel like so ... much. Let podcast hosts Rob Carrick and Roma Luciw help you out in Season 9 of Stress Test.
Charted
Nickel prices have been falling since January of 2023 as production outpaces demand, and have dropped significantly in the past two months, Brian Donovan writes. Preliminary figures for 2024 indicate another surplus, with production forecast to rise to 3.7 million tonnes and usage to reach 3.4 million tonnes. If we had a nickel, should we have sold it in 2022? Demand for EVs and batteries could improve its fortunes. Read more here.
The lookout
On our radar and reading list
Mining: First Quantum has reached an agreement with major Chinese shareholder Jiangxi Copper to curb its power.
Musk: Tesla reports its lowest profit margin in more than five years and misses Wall Street earnings targets as the electric vehicle maker cut prices and increased AI spending.
Earnings: Today’s reports include Rogers Communications, Teck Resources, Waste Connections, West Fraser Timber, AT&T, and Chipotle.
Economy: The Bank of Canada announcement is at 9:45 a.m. ET. On Thursday, G20 central bankers and finance leaders meet in Rio de Janeiro to reach consensus (😬) ahead of the U.S. election.
Morning markets
Global stocks traded lower as lacklustre earnings from tech giants Tesla and Alphabet subdued risk appetite. The dour mood looked set to continue in North America, where Wall Street and TSX futures were pointing lower.
Overseas, the pan-European STOXX 600 was down 0.39 per cent in morning trading. Britain’s FTSE 100 fell 0.15 per cent, Germany’s DAX declined 0.71 per cent and France’s CAC 40 gave back 0.94 per cent.
In Asia, Japan’s Nikkei closed 1.11 per cent lower, while Hong Kong’s Hang Seng dropped 0.91 per cent.
The Canadian dollar traded at 72.53 U.S. cents.