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Canadian mortgage holders wince as U.S. rates drive ours up

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Stronger-than-expected U.S. employment numbers are good news on a number of fronts, but could prove to be a knife in the back for Canadian homeowners.

Ten-year U.S. Treasury bond yields surged Friday from 2.5 per cent to 2.71 per cent after monthly employment data showed 30,000 more jobs were created than economists had expected. As always happens, Canadian bonds immediately followed suit, despite a marked difference in domestic employment numbers.

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Canada is a proudly independent nation, but our bond market apparently did not get the memo. The U.S. Treasury market is so big, and so globally dominant, that Canadian bonds trade almost directly in accordance, even when the respective economies are going in different directions. The correlation between Canadian and U.S. five-year bond yields is 0.98 (see chart).

The current problem for Canadian homeowners is that, economically justified or not, Canadian yields are moving higher along with American yields. As a result, Canadian mortgage rates are also likely to climb. While the 10-year U.S. Treasury moved up more than a percentage point from its trough in early May of 1.63 per cent, the Canadian five-year bond has also risen a sizeable 63 basis points in the same period.

Canadian housing market activity appeared to strengthen in May, which some observers attribute to savvy buyers locking in lower rates in anticipation of rises. Higher mortgage rates would represent another hurdle to further housing price increases. Homeowners, with debt levels already well beyond the pre-crisis U.S. peak, will become increasingly stretched as monthly mortgage payments climb.

A U.S. economic recovery will increase demand for Canadian exports and in this way is a positive for the domestic economy as a whole. It just might be painful in the short term for Canadians looking to sell their home.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .

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