On the Radar: Could US Fed Instability Lower Canadian Mortgage Rates?

Key points

• Canadian fixed mortgage rates tend to follow Government of Canada bond yields, particularly the 5-year and 10-year maturities, adjusted for a lender spread.
• If confidence in U.S. institutions and Federal Reserve independence weakens, global investors can diversify into other high-quality sovereign bond markets, including Canada. If that demand is sustained, it can pull Canadian yields lower and, over time, fixed mortgage rates can follow.
• So far, the early price action has been more about volatility and currency moves than a clear decline in Canadian bond yields. This is not unusual, as large bond allocations often shift gradually rather than overnight.

What happened over the last few days?

Over the weekend, the White House-Federal Reserve conflict escalated after Fed Chair Jerome Powell said the Trump administration had threatened him with a criminal indictment tied to the Fed’s headquarters renovation, and he framed it as a pretext to pressure the Fed to cut rates. By Monday, markets responded with broad-based U.S. dollar weakness, softer risk sentiment, and a bid for safety. By Tuesday, global central bank leaders and major financial figures publicly rallied to defend Federal Reserve independence, while investors debated whether this could become another catalyst to diversify away from U.S. assets.

Why is past history a weak guide this time?

Normally, in our On The Radar posts, when we try to forecast where Canadian mortgage rates go, we lean on historical playbooks. The problem is that the specific mix on the table now, a criminal probe aimed at a sitting Fed chair plus open political pressure on monetary policy, is not a clean repeat of prior cycles. There is no widely accepted playbook for how markets reprice when Fed independence is challenged in this way.

What are economists and strategists saying?

Some strategists are focused on institutional risk premiums and market functioning. Karl Schamotta at Corpay warned that aggressive legal threats can undermine the dollar’s safe-haven role and alter how investors perceive long-term risk.

Charu Chanana at Saxo Bank argued that such headlines can force markets to price in governance risk. She noted that governance shocks tend to show up first in FX and gold, and then in rate volatility.

Other market participants are framing the episode as a catalyst for diversification. Thierry Wizman at Macquarie linked concerns about Fed independence to another reason for investors to diversify out of U.S. dollars over time, even if the immediate market reaction remains muted.

Others argue the near-term impact may stay limited. Prashant Newnaha at TD Securities said that short-term impacts should be limited and noted that, structurally, the Federal Reserve is accountable to Congress rather than the president.

What markets did right after the news?

In Canada, the first trading-day reaction did not look like a large, immediate rush into Canadian bonds. On Monday, January 12, the Canadian dollar rose by approximately 0.3% to approximately 72.1 U.S. cents. A stronger loonie may reflect foreign demand for Canadian bonds, but market commentary framed this move primarily as U.S. political risk and U.S. dollar weakness, rather than as clear evidence of Canada-specific inflows.

On the rates side, Canadian yields edged higher. The Canadian 10-year rose about 0.7 basis points to 3.40%. In other words, there was no immediate “yields down, mortgage rates down” signal.

In the U.S., Treasury yields moved only modestly. The 10-year Treasury yield finished Monday slightly higher at about 4.19%, suggesting markets were digesting the headlines without an immediate, decisive shift into duration.

Could this actually lower Canadian mortgage rates?

The link between Canadian mortgage rates, funding costs, and bond yields is well established. The Bank of Canada notes that Canadian lenders fund themselves through domestic and foreign depositors and investors, and that Canadian interest rates respond to developments elsewhere, including in the United States. That matters if U.S. institutional risk begins to influence global rates and global risk appetite.

If the “diversify away from the U.S.” narrative becomes a reality through sustained buying of Government of Canada bonds, especially in the 5-year area, that demand could pull Canadian yields down, and fixed mortgage rates could follow with a lag. In that scenario, the Canadian dollar could also strengthen if foreign buyers purchase Canadian bonds without fully hedging their currency exposure, as they must transact in Canadian dollars.

It is also worth setting expectations for timing. Large allocators rarely pivot bond exposures in a single step. Rebalancing typically occurs in increments, and the bond market can trade within a range while investors assess whether a political risk becomes persistent or fades.

Conclusion

It is plausible that U.S. Federal Reserve instability could eventually help lower Canadian fixed mortgage rates, but the pathway runs through sustained demand for Government of Canada bonds and through meaningfully lower Canadian yields.

That lack of immediate confirmation is not unexpected. If this becomes a longer-running story, the more likely pattern is gradual reallocation over weeks and months, not a knee-jerk overnight repricing.

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