"Risk-on" trading in the bond market refers to investors favouring higher-yielding, riskier bonds over safer, lower-yielding securities like government bonds.
This typically occurs in optimistic economic environments, where confidence drives demand for stocks, corporate bonds, high-yield junk bonds, or emerging market debt, seeking greater returns.
Risk-on sentiment often leads to tighter credit spreads, as investors downplay default risks.
More importantly for mortgage rates, it can depress prices and raise yields of safe-haven assets like U.S. Treasuries and Canadian government bonds. This happens as capital flows toward riskier instruments, reflecting a bullish outlook on economic growth and market stability.
Risk-off bets are the exact opposite, reflecting a flight to safety into government bonds and depressing government bond yields.