Canadian fixed mortgage rates are dropping as U.S. tariffs shake markets

Canada’s 5-year bond yield has fallen to its lowest level since June 2022, following fresh concerns over economic uncertainty and global trade tensions.

Markets reacted to news that the U.S. followed through on its threat to impose 25% tariffs on most Canadian goods and 10% on oil and gas—the biggest trade shock Canada has faced since the 1930s.

The Government of Canada 5-year bond yield dropped to 2.55%—its lowest level since June 2022—before rebounding slightly to 2.63% by mid-day Monday. (Update: By Tuesday morning, yields had risen to 2.75% on news that President Donald Trump agreed to pause the implementation of the tariffs for at least 30 days.)

“It looks like everyone is getting the lower bond yield they wanted,” noted rate-watcher Ryan Sims of TMG, noting that it unfortunately comes at the cost of economic turmoil.

Several lenders began cutting rates over the weekend, some by as much as 25 basis points (0.25%). Rate expert Ron Butler of Butler Mortgage told Canadian Mortgage Trends he expects further reductions, with insured rates dropping by 20–25 bps and conventional rates by up to 30 bps.

While a handful of sub-4.00% insured rates are already available, Butler expects more to emerge this week.

“If that drop holds, it means almost all fixed rates start with a three by the end of the week,” he posted on social media.

However, he cautioned that it’s all speculation for now, as there’s no telling how long these tariffs will stay in place. “The highest likelihood is that all fixed rates fall before they are forced back up by inflation months from now,” he added.

Rate cuts driven by economic uncertainty

The sharp drop in bond yields reflects investor fears that new tariffs will slow trade, weaken growth, and increase the chances of Bank of Canada rate cuts.

A report from RBC Economics says a persistent tariff of this magnitude is recessionary for Canada and could drive up the current unemployment rate of 6.7% higher by an additional two to three percentage points.

“If sustained, our initial analysis suggests that tariffs of this size (based on many assumptions) could wipe out Canadian growth for up to three years, with the largest impacts in the first and second years,” the report notes.

Retaliatory measures announced in Canada—25% tariffs on $155 billion of U.S. goods— while aimed at the U.S. economy, are still expected to slow growth and drive up inflation on targeted goods, RBC notes.

In its latest Monetary Policy Report, the Bank of Canada estimates that if tariffs on all imports remain in place, GDP growth would be 2.4 percentage points lower in the first year and 1.5 percentage points lower in the second year.

“Our calculations show if these tariffs are sustained for 5 to 6 months, it would officially tip the domestic economy into recession, albeit a relatively shallow one at that point,” notes a report from TD Economics. “Further duration would naturally deepen the contraction.”

Last week, Bank of Canada Governor Tiff Macklem warned that tariffs could put upward pressure on inflation.

“A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada,” he said following last week’s policy announcement. “At the same time, the higher cost of imported goods will put direct upward pressure on inflation.”

However, the BoC is expected to “lean toward providing support to the economy,” noted Charles St-Arnaud, Chief Economist with Alberta Central.

“We believe that the BoC will take the view that the inflationary impact of tariffs will mainly be short-lived because it is a one-off jump in prices, not a constant increase in prices,” he wrote in a research note. “This means it will only temporarily push inflation higher unless the shock de-anchors inflation expectations or changes businesses’ pricing behaviour.”

As a result, the Bank of Canada is seen delivering additional rate cuts throughout the year.

BMO now sees a quarter-point rate cut at each of the Bank’s meetings this year until October, while National Bank says there are grounds for an “emergency” inter-meeting rate cut.

“Note that an emergency action would argue for a larger-than-normal cut of at least 50 bps,” wrote economist Stéfane Marion. “Beyond a near-term inter-meeting action, additional relief at the scheduled March and April meetings (25 bps each) would quickly lower the policy target rate to 2% by spring.”

Source: Canadian Mortgage Trends