The Canadian real estate industry may focus on rate decisions, but the mortgage industry is watching bond markets. The Government of Canada’s (GoC) 5-year bond yield—a key benchmark for fixed-rate mortgages—has surged in recent weeks, pushing borrowing costs higher instead of providing relief. The move reflects rapid market repricing, driven by stronger economic data and a global trend of rising yields.
What Does Government Debt Have To Do With My Mortgage?
Mortgage rates are based on benchmark borrowing costs for similar terms. The Bank of Canada’s overnight rate gets virtually all the attention, but it only impacts variable-rate mortgages. Canadian borrowers tend to prefer the stability of fixed-rate mortgages, which are priced off GoC bond yields of matching durations. The 5-year is of particular importance, as it’s the traditional weapon of choice for homeowners.
Government bond yields are set by supply and demand. When investor demand grows faster than government borrowing, yields fall. When government borrowing outpaces demand, yields rise to attract capital. Investor appetite is further shaped by inflation and global competition, as capital flows towards markets offering the best balance of risk and return.
Mortgage rates reflect these yields, plus a lender spread.
Canadian Government Bond Yields Are Surging, Applying Upward Pressure On Mortgage Rates
Recent economic data and upward revisions have pushed GoC bond yields sharply higher. The 5-year GoC yield jumped 19 basis points (bps) over 5 days, settling at 3.0% yesterday. It’s added 23 bps over the past month, reaching the highest level since August 2025. Any lender cuts right now would be margin compression, not market-driven.
The odds that this move is a short-lived blip are also fading. Over the past year, the 5-year yield is up 11 bps, barely half of the increase seen in the past month alone. That divergence signals a rapid repricing of expectations rather than a gradual trend, consistent with stickier inflation assumptions and stronger-than-expected economic data.
This is new territory for Canadian real estate. Before 2022, the GoC 5-year yield only touched 3.0% briefly in 2010 and hasn’t been past that threshold persistently since 2008. As financing conditions revert towards those norms, it raises uncomfortable questions about sustainability given that home prices have climbed 105% since 2010, while incomes grew just 35%. This topic warrants a deeper dive at a later date, but it’s worth keeping in mind.
For now, let’s get back to the topic of rising yields—and how this trend is driven by more than local factors.
Canadian Bond Yields Are Being Pulled Higher By A Global Surge
Rising bond yields aren’t just a Canadian phenomenon. This morning BMO Capital Markets released a new research note on rising yields across advanced economies. “…government bond yields across much of the advanced economies this year [are climbing], and despite central bank interest rate cuts in many cases,” explains BMO Chief Economist Douglas Porter.
“In Canada, 10-year GoCs are on track to end the year higher than they began 2025, despite the fact that the BoC has chopped rates 100 bps this year. The late-year shift in BoC rate expectations played a part, but so too has the upward pull from the rest of the world.”
BMO’s analysis places Canada in the context of two key markets: the UK and Japan. The UK tracked closely with Canada for roughly 15 years before its recent divergence, driven by investor concerns over the UK’s fiscal picture. Japan’s long-stagnant economy is now seeing its 10-year yield approach 2% for the first time since the late 1990s.
Government debt across advanced economies competes for global capital based on yield. Central banks can temporarily suppress borrowing costs in an emergency, but that relief comes at the price of higher inflation. Over time, this creates higher funding costs as investors demand a globally competitive yield and protection against inflation and currency erosion.
Written by Better Dwelling