2024 Annual Canadian Bond Market Review: A Commercial Mortgage Perspective:

2024 overall spelled good news for Canadian real estate investors. Canada’s 5-year government bond yields decreased by 21 basis points (bps) from 3.17% to 2.96% although the 10-year government bond yield increased by 13 bps to 3.23%. Notably, 10 year was lower than 5 year at start of year and at end of year that has reversed

Source: GreenBirchCapital.com/Bond-Yields/#

While those looking further out and for longer term money may be dismayed by higher 10 year yields, its important to note that stronger economic data is driving the yields up and does overall point to a strengthening Canadian economy.

So what’s driving the yield changes and how does it impact commercial real estate investors.

1. The Bank of Canada initiated a series of rate cuts in 2024 to stimulate economic growth. The overnight rate was cut by 175 bps over the year, bringing it to 3.25% by December 2024. This immediately helped existing real estate investors without fixed rate mortgages and alleviated debt servicing pressures. Those looking for new money also benefited from lower rates.

2. Indicators pointed to a deceleration in the Canadian economy prompting investors to seek the relative safety of government bond. This pushed up demand for medium term maturities such as the 5-year bond and decreased yield. Paradoxically, this led to increased optimism

in the commercial real estate sector as the lower yields pointed to continued favorable financing conditions, which supported strategic planning and investment decisions.

3. Inflation edged down to 1.9% in December as prices adjusted to the BoC’s previous rate hikes, global commodity prices particularly oil decreased and employment rates increased couped with lower per-capital GDP. Lower inflation should also help commercial real estate investors as it should lead to more stable prices on key inputs in the construction industry as well as alleviate risk of BoC rate increases.

4. Global financial conditions eased, with expectations of International economic uncertainties and geopolitical tensions led to a flight-to-quality among investors, increasing demand for Canadian government bonds and exerted downward pressure on 5-year government bond yields.

Upcoming Events to Watch

Looking ahead to 2025, several events could influence Canadian bond yields:

· Bank of Canada Policy Meetings: The BoC's decisions on interest rates will continue to be pivotal. The first meeting is scheduled for January 29, 2025 with Economists expecting rates to be reduced by 25bps to 3%. Notably, this comes on the back of Trump taking office and potentially implementing tariffs on Canadian products exported to the US.

· Federal Budget Release: Expected in March 2025, the federal budget will outline fiscal policies that could affect economic growth and bond markets. That being said, a Canadian election anticipated in the Spring and the potential for a Conservative government may dampen its impact.

· U.S. Federal Reserve Meetings: The Fed's policy decisions, particularly those related to interest rates, can have spillover effects on Canadian yields. The next meeting is on January 29, 2025.

· Economic Indicators: Monthly releases of employment data, inflation rates, and GDP growth figures will provide insights into the health of the Canadian economy and potential yield movements.

· Global Economic Developments: Most impactful will be the potential for President Trump to put tariffs on Canadian products on February 1.

Closing Thoughts on Market Uncertainty

Bond markets typically incorporate known information into current yields; however, unexpected events can significantly influence movements. 2024’s increasing and decreasing yields highlight how economic data, central bank signals, and global sentiment collectively shape market dynamics. For commercial mortgage borrowers, staying informed and maintaining flexibility are essential strategies to navigate these unpredictable financial waters.

Bank of Canada 2025 Interest Rate Announcement Schedule

The BoC has released its schedule for policy interest rate announcements in 2025:

· Wednesday, January 29, 2025

· Wednesday, March 12, 2025

· Wednesday, April 16, 2025

· Wednesday, June 4, 2025

· Wednesday, July 30, 2025

· Wednesday, September 17, 2025

· Wednesday, October 29, 2025

· Wednesday, December 10, 2025

Each announcement is scheduled for 9:45 AM Eastern Time. The Monetary Policy Report will be published concurrently with the January, April, July, and October rate announcements.

Staying informed about these dates is crucial for anticipating potential changes in interest rates, which can directly impact mortgage rates and financial planning.