SVB instability could drive some Canadian mortgage rates lower. Here’s why

The collapse of Silicon Valley Bank and fears of wider financial instability has led some market forecasters to revise interest rate path expectations.

The fallout from the collapse of Silicon Valley Bank has spread to the Canadian mortgage market, with some forecasters now expecting the Bank of Canada to cut interest rates sooner than previously thought.

But some experts say that while the recent shakeup in financial markets could drive fixed-rate mortgage rates lower in the near term, whether the disruption is enough to shake the Bank of Canada off its rate path remains to be seen.

SVB’s collapse late last week, followed by the folding of Signature Bank on Sunday, has sent shockwaves through the global financial system amid fears of contagion sinking other banks.

Ratings agency Moody’s on Monday cut its outlook on the U.S. banking system to negative from stable “to reflect the rapid deterioration in the operating environment.” Meanwhile, the VIX volatility index, Wall Street’s “fear gauge,” neared six-month highs overnight.

Despite these concerns, American bank stocks have rallied on Tuesday as officials in both the U.S. and Canada moved to reassure market players that their respective financial systems are safe from wider market collapse.

That instability has had major impacts on Canada’s bonds market — an important gauge for mortgage rates in the country.

Anytime there’s major risk in capital markets, investors will “run for cover,” says Shubha Dasgupta, CEO of Toronto-based digital mortgage agency Pineapple.

That “cover” came in the form of Canadian bonds to start the week, he says, specifically the five-year bond. The rush to these safe-haven investments drove down the pricing of these bonds, which are directly correlated to fixed interest rates in Canada.