Tariff-induced market chaos could lead to lower mortgage rates

Global markets tumbled Thursday in reaction to the latest round of U.S. tariff warfare, spurring fears of a global recession as many nations face a 50-per-cent reciprocal tariff on goods imported to the United States, along with a 10-per-cent baseline levy.

Donald Trump’s widening trade war will cause widespread economic pain. And although the U.S. President spared Canada from any new reciprocal tariffs in Wednesday’s announcement, our country will still face steep trade challenges as growth slows here, overseas and south of the border.

The only Canadians coming out ahead are, perhaps, those shopping for a fixed mortgage rate. That’s because pricing for this type of mortgage takes its cues from bonds – and bond yields have reacted to the latest tariff news by plunging to lows not seen in three years.

Global stock markets were in chaos on Thursday. The big three U.S. markets – the S&P 500, Dow Jones Industrial Average, and Nasdaq – fell sharply, adding to weeks of losses. Investors, gripped by fear, have been piling into safe haven investments, such as treasuries and bonds.

The U.S. 10-year Treasury yield, which acts as a benchmark for global debt prices, plunged to 4 per cent Thursday, down about 20 basis points for the day. (A basis point is 1/100th of a percentage point.)

Government of Canada bond yields were much steadier, but the five-year yield was still near three-year lows. That puts heavy downward pressure on fixed mortgage rates, which have already been discounted in recent weeks, as evolving tariff threats have shifted investor sentiment lower.

Mortgage lenders cut rates early this week, including to a 3.74-per-cent five-year fixed rate for insured borrowers – which went into effect on April 1 – and a 3.99-per-cent option for uninsured (those who pay more than 20 per cent down on their home purchase). These are lows not seen since the summer of 2022.

If you’re currently shopping for your mortgage, coming up for renewal, or looking to refinance, it’s smart to put in an application now. Doing so will give you access to rate hold options, allowing you to secure today’s rate pricing, even if interest rates rise in the near future.

And the possibility of higher rates remains. In the aftermath of the latest Trump tariffs, economists and mortgage-rate analysts are looking for clues as to how the Bank of Canada will respond to this new global trade war.

Back in late January and February – the early days of the evolving trade threat – it had been economists’ consensus that the central bank would slash its trend-setting rate if faced with a tariff-induced recession, perhaps to as low as 1.5 per cent.

But the Bank of Canada has since reined in those wild rate-cut expectations. In its most recent summary of deliberations released on March 26 – which digs into the reasoning behind the March 12 rate announcement decision – the governing council states that it would have kept its rate unchanged, if it hadn’t been for tariff uncertainty. February’s inflation rate, which rose at an annual pace of 2.6 per cent, would have otherwise prompted the bank to hold rates.

Bank Governor Tiff Macklem has also made it clear in various speeches that, in a trade war, the role of the central bank is limited. It can not counter tariffs with interest-rate cuts alone, without the aid of federal government fiscal stimulus.

Prior to Mr. Trump’s April 2 tariff bombshell, the above signs pointed toward a likely hold from the central bank in its next rate announcement on April 16 – but as the trade narrative can rapidly change, so too can the central bank’s response.

All borrowers can count on is continued volatility, as markets continue their wild ride.

Penelope Graham is the director of content at Ratehub.ca.