WHY CANADIAN MORTGAGE RATES MAY BE STEALTHILY HEADING HIGHER

As I jot this note, Canada's five-year government bond yield is hitting its peak for the year. There's a growing risk we may even make new cycle highs if the next month of economic data doesn't cool.

But if you're a low-rate lover, don't despair just yet. Despite this latest hiccup in bond yields and irresponsibly large government stimulus, the highly leveraged Canadian economy isn't immune to multi-decade highs in policy rates.

That's why forward rate markets, where traders hedge against or speculate on interest rates, still see two Bank of Canada rate cuts this year, starting this summer, according to data from CanDeal DNA. That's despite the increasing likelihood that U.S. rate cuts will take longer.

On the mortgage scene, it was quieter than a mime's convention this week, save for a five-basis-point jump in four-year fixed rates. This tranquillity may be shortlived, however. Those surging bond yields are likely to push up some of the most competitive fixed rates. That's particularly true for default-insured mortgages, which are more tightly linked to bond market movements. Hence, if you're out there hunting for a fixed mortgage, lock that rate in like it's the last lifeboat on the Titanic.

As for variable rates, bond markets want to see weaker employment, inflation and GDP reports on May 10, May 21 and May 31, respectively. That could give the Bank of Canada enough confidence to cut in June or July.

That's a lot to rely on, of course, and the U.S. may steer Canada's rate ship in the meantime. So expect potential rate detours before borrowing costs get better.