Government of Canada Bonds
They say life isn’t fair, but it’s still fairer than death. (Cheery thought, right?) When you or I need to borrow money, we have to apply for a loan, and our approval depends on our ability to repay—not just our desire for the money. But when the Government of Canada needs money to cover a deficit or fund a new project, it simply issues bonds. If only we could do the same when we’re short on cash…
These bonds, sold at auction to a wide range of investors (individuals, banks, pension funds, and foreign entities), help finance everything from public programs to infrastructure projects. Canada regularly issues both short-term debt (like treasury bills) for immediate cash needs and longer-term bonds for bigger projects or to help stabilize the economy. In the 2021–2022 fiscal year, for example, the government issued a combined total of $107.0 billion in 10-year and 30-year bonds—slightly higher than the $105.5 billion issued the previous year and miles above the $19.0 billion issued in 2019–2020. Talk about a spending spree, right?
This process is closely managed to keep investors confident (and hopefully awake) and ensure borrowing costs stay sustainable.
Understanding Quantitative Easing and Tightening: What It Means for You as a Homeowner
You may have come across the terms quantitative easing (QE) and quantitative tightening (QT). They can sound about as exciting as watching paint dry, but they matter—a lot—especially if you’re a homeowner or considering buying a home.
What Is Quantitative Easing (QE)?
Quantitative easing is a strategy used by central banks—like the Bank of Canada—to stimulate the economy during a slowdown.
- The Central Bank Buys Bonds
The Bank of Canada purchases government bonds or other financial assets from banks and investors. (Not just for fun—they have a plan in mind.) - Increases the Money Supply
By buying these assets, the central bank pumps more money into the financial system. - Lowers Interest Rates
With more funds in circulation, borrowing becomes cheaper—often leading to lower mortgage rates. (The dream scenario for any homebuyer!) - Boosts Economic Activity
Lower rates encourage businesses to invest and consumers to spend, helping to revive economic growth.
During the COVID-19 pandemic, central banks worldwide employed QE to support their economies. You probably remember those historically low mortgage rates. QE was a major reason they stayed so low. (That, and maybe the universe was feeling generous for a moment.)
What Is Quantitative Tightening (QT)?
Quantitative tightening is the flip side of QE. It’s used when the economy might be overheating or inflation is too high.
- The Central Bank Sells Bonds
The Bank of Canada sells government bonds or allows them to mature without reinvesting. - Reduces the Money Supply
This process pulls money out of the financial system. (Kind of like that buddy who insists you pay him back for lunch… except on a national scale.) - Raises Interest Rates
With less money available, borrowing costs go up, often resulting in higher mortgage rates. - Slows Economic Activity
Higher rates discourage spending and investing, which can help bring inflation under control.
If you’ve noticed rising interest rates lately, you can probably thank QT. It’s the central bank’s big lever for reining in inflation and preventing the economy from going off the rails.
How U.S. Tax Cuts Can Affect Canadian Mortgage Rates
Let’s throw another variable into the mix: our neighbors to the south. U.S. tax policy can indirectly influence Canadian bond yields (and therefore mortgage rates).
- Issue More Bonds
When U.S. administrations cut taxes, they collect less revenue. To cover any shortfall, the U.S. Treasury issues more bonds. - Attract Investors with Higher Yields
More U.S. bonds on the market means they might have to offer juicier yields to entice investors. (Nothing like a higher return to turn some heads.) - Trigger a Shift from Canadian to U.S. Bonds
Once U.S. bonds look more appealing, some investors may trade in their Canadian bonds for shiny American ones. - Push Canadian Yields—and Mortgage Rates—Higher
If investors are leaving Canadian bonds behind, Canadian yields have to rise to stay competitive, nudging mortgage rates up.
Yes, we Canadians sometimes get stuck in the backseat of that road trip, even though we never asked to be passengers in the first place.
Why Does This Matter for Homeowners and Buyers?
QE, QT, and external factors like U.S. tax policy directly impact how much you’ll pay for a mortgage.
- During QE: Mortgage rates tend to be lower. It’s often a good time to lock in a rate or refinance (like scoring a half-price deal at your favorite store).
- During QT: Mortgage rates usually rise. If you’re planning to buy a home, be prepared for heftier monthly payments.
- External Influences: Major U.S. policy decisions (like tax cuts) can suck capital out of Canada, raising bond yields and mortgage rates here at home.
Working with a mortgage professional can help you stay ahead of these shifts. After all, there’s nothing like personalized advice to keep you from feeling like a deer in headlights.
Key Takeaways
- Quantitative Easing (QE) stimulates the economy and often leads to lower mortgage rates.
- Quantitative Tightening (QT) cools the economy and typically pushes mortgage rates higher.
- U.S. Tax Policy (e.g., tax cuts) can also influence Canadian bond yields and mortgage rates by enticing investors away from Canada.
- Domestic & International Policies shape the housing market and affect your borrowing costs—sometimes when you least expect it.
If you’re uncertain about how these changes could affect your mortgage or future homebuying plans, I’m here to help..