Why Bond Yields Are Rising and What It Means for Canadians

News Analysis

Borrowing costs are rising in Canada, with economists warning that higher bond yields, a contributing factor, could eventually feed through to mortgages, business financing, and the broader Canadian economy.

The 10-year yield for Canadian government bonds has just hit 4 percent for the first time since 2023, while the 30-year bond yield reached 4.3 percent for the first time since 2007.

The problem is not unique to Canada; the increase is part of a broader global rise in long-term government bond yields. Bond markets in the United States, the United Kingdom, Germany, Japan, and Australia have experienced significant increases in recent months, as investors contend with inflation concerns, higher energy prices, increased government borrowing, and uncertainty over monetary policy.

In Canada, economists say higher yields reflect a combination of global bond-market pressures, concerns about government deficits, and inflation. They also say this will have wider implications for Canadians.

Tom Czitron, an investment strategist and global macro analyst, says he believes the primary reason for higher bond yields is rising inflation, which is causing investors to seek higher returns.

“The bond market is basically saying, ‘Look, we’re throwing in the towel on getting back to 2 percent inflation immediately,’” Czitron said in an interview.

He also said higher yields will likely weigh on economic activity as households and businesses face higher borrowing costs.

Steve Ambler, professor emeritus of economics at the University of Quebec in Montreal, says concerns about Canada’s fiscal situation are contributing to higher bond yields. He pointed to geopolitical uncertainty stemming from the Iran war and energy crisis as well, saying investors “are wanting to be paid an extra little bit to compensate for that uncertainty.”

Concerns Over Deficits, Inflation

Bond yields represent the annual return investors receive for lending money to a government by buying its bonds. Governments issue bonds to borrow money, and investors can trade those bonds on financial markets, causing their prices and yields to fluctuate.

Canadian and American bond yields had been trending downwards for several decades—reducing the amount of money investors were making by holding government debt—and eventually hitting near zero at the start of the COVID-19 pandemic. But in both countries, yields have risen since then.

Czitron said concerns over mounting budget deficits in the United States and other countries are contributing to higher bond yields. The U.S. federal deficit in fiscal year 2025, at US$1.8 trillion, was equivalent to 5.8 percent of GDP, up from US$984 billion in 2019, or 4.6 percent of GDP. Meanwhile, in fiscal 2026, net interest costs on the over US$40 trillion of national debt are now the second-largest spending category (15 percent) in the federal budget, behind Social Security (22 percent).

In Canada, the federal budgetary deficit was equivalent to 1.7 percent of GDP in fiscal 2019–20 and 1.2 percent in fiscal 2024–25, according to Finance Canada.

Czitron adds that inflation has continued to accelerate upward.

“I think there was a belief that [inflation] rates would come down to what they were during the zero-interest rate policy era,” he said. “It’s been almost four years, and inflation really hasn’t come down. If anything, it’s accelerating.”

The U.S. year-over-year inflation rate reached 3.4 percent in August, while annual inflation in Canada reached 3 percent that month. This comes as the global energy crisis caused by the U.S.-Iran war has pushed oil prices above $100 a barrel at times, and contributed to tight diesel supplies. Diesel is a key fuel for trucking and other forms of freight transportation.

‘Spillover’

Citing another factor for the increase in bond yields in Canada, Ambler said there has also been a “spillover from foreign bond yields,” as U.S. bond markets have a major influence on other countries’ bond markets. He said higher U.S. bond yields can make U.S. bonds more attractive to investors, potentially reducing demand for Canadian bonds, which would put downward pressure on their prices and push their yields higher.

Ambler also said interest rates had been trending downward for decades, partly because demographic trends expanded the global labour supply and helped keep the prices of goods low. He pointed to hundreds of millions of Chinese people moving from rural areas to work in manufacturing in cities as a major factor, but said the downward trend for interest rates has now come to an end.

“I think we are looking at an end to that decline in interest rates. I don’t know how quickly they’re going to go back up, but they’re not going down at all from this point onwards,” Ambler said.

Bank of Canada governor Tiff Macklem told reporters on Sept. 2, following the bank’s decision to keep its policy rate at 2.25 percent, that concerns about inflation and government debt levels are causing markets to price in the possibility of higher interest rates.

“Central banks’ tolerance for higher inflation is limited, and that is causing the market to build in the possibility of future interest rate hikes. So, all those things are tending to work in the same direction to boost global bond yields,” Macklem said.

Impact of Higher Bond Yields

Czitron said higher bond yields will make borrowing more expensive and can contribute to higher mortgage rates for Canadians, particularly those with five-year fixed-rate mortgages coming up for renewal. He also said the widening spread between U.S. and Canadian bond yields, with U.S. bonds becoming more attractive to investors, could put downward pressure on the Canadian dollar.

For bond yields to fall, Czitron said there would need to be a “break in inflation, or an anticipation of a break in inflation.” But he said that with the Iran war continuing and diesel shortages growing more acute, inflationary pressures will likely continue into 2027.

However, Czitron said higher yields could also make bonds more attractive to investors, potentially increasing demand for them and pushing their prices higher, which would then reduce their yields.

Ambler said higher bond yields will make Canadians’ investment decisions “more difficult,” particularly for borrowers and mortgage holders.

“For people who are net savers, they have some complicated decisions to be making about what their portfolio balance should be, between bonds and the stock market,” he said.

Avery Shenfeld, managing director and chief economist of CIBC Capital Markets, said in a Sept. 28 note to investors that rising term rates on mortgages will put further downward pressure on Canada’s “already soft homebuilding sector.”

Shenfeld also said rising bond yields will “add to the damping impact of tariff uncertainties on business capital spending in sectors vulnerable to US trade barriers.”

Higher bond yields could slow the Canadian economy, Shenfeld added, which could reduce the need for the Bank of Canada to raise interest rates to tamp down inflation.

“If high (not necessarily higher) for longer is in the future for interest rates further out the yield curve, the resulting crowding out of interest-sensitive demand would be a substitute for some of the policy-rate hikes that markets are expecting,” he said.