Today’s historically low bond yields beg a very interesting question: just how low can yields go? It may surprise you to know that the bottom in bond yields is actually (theoretically) below zero.
Negative bond rates have numerous precedents. Government yields from countries like Japan, Switzerland, Germany, Sweden and even the U.S. have all been sub-zero. When yields dip below zero, it means giant fixed-income investors are paying for a safe place to park their billions.
As just one example, observe this chart of the Swiss 2-year government bond. It’s been underwater (with a yield below zero) for several quarters.
Some wonder if this could ever happen in Canada. Many feel it’s so unlikely as to not bother entertaining the thought, especially for longer duration bonds like the 5-year.
To hammer Canadian yields down to zero (or below) would take persistently feeble growth and inflation, coupled with aggressive bond buying, including considerable safe harbour buying and/or quantitative easing. If it ever did happen, 5-year mortgage rates could dive to astonishingly low levels, perhaps as low as 150-175 basis points above a 0% 5-year government bond.
Mind you, while a 1.50% 5-year fixed rate may sound enticing at first blush, we best hope that Canada never sees those rates. They’d likely be accompanied by dire economic and employment ramifications.
In any case, the fact that negative yields are possible in Canada doesn’t make them probable, at least not in the near term. Moreover, this theoretical discussion does little to help someone pick the right mortgage, other than to quash thinking that rates can’t fall much lower. But even that is a worthy endeavour, to the extent it reminds people that locking in is not the only rational mortgage strategy.