5 Year Government of Canada Bond Yield Explained
The 5-year government bond is a low-risk investment available to Canadians, so low-risk that it is also called a security. The Canadian government backs bonds, and the coupon yield is returned regularly at a set percentage of the bond’s face value.
In this article, we cover what a government bond is, the factors that determine bond yields, why the 5-year bond is important and how it affects mortgage rates in Canada.
Key Takeaways
- Bonds are investment instruments issued by the Canadian government to raise funds for operations and to repay its debts.
- A bond’s yield measures the value it returns over its life.
- 5-Year fixed-rate mortgages generally follow 5-year government bonds, with an additional 1-2% spread over the bond yield.
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Canada 5-Year Bond Yield
Bank of Canada 5-Year Bond Yield Explained
What Is a Government Bond?
A government bond is a security, meaning the buyer lends the government money in exchange for a guarantee that the face value will be repaid when the bond matures. Government bonds are issued to fund government operations and cover year-end budget deficits. Bonds are considered secure investments, particularly in Canada, because the government is unlikely to default on bond repayments.
What Is a Government Bond Yield?
The buyer will receive interest payments on the amount lent to the government for the bond’s term (e.g., 5 years). Yield is the annual bond’s return, calculated as a simple coupon yield (a set percentage of the bond’s face value paid at regular time intervals, e.g. 10% a year) or the more complex yield to maturity (YTM).
Unlike coupon yield, a bond’s YTM is the sum of all interest payments you would receive over the bond’s life, plus any gains or losses from buying the bond at a discount or premium, providing an overall view of the bond’s lifetime yield.
For example, if you bought a bond at a $1,000 face value with a 20% coupon, you would receive $200 per year until maturity, at which point you would also be repaid the face value ($1,000).
However, if you sold the bond, its price may have changed. If the bond is now worth $800, it sells at a discount. Likewise, at $1,200, the bond would sell at a premium. However, the coupon percentage remains the same.
The buyer of the bond, whether they purchased it for $800 or $1,200, would still receive $200 in annual interest based on the bond’s original face value. The bond yield will change based on the coupon amount as a percentage of the new selling price. If you sell the bond for $800, the new yield is 25% ($200/$800). If you sell the bond for $1,200, the new yield is approximately 16.67% ($200/$1,200).
If all this sounds complicated, don’t worry. The key point is that a bond creates value over its life until maturity, and the yield measures how much value it creates.
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Why Does the 5-Year Bond Yield Matter?
Bond yields are considered one of the safest investments because they are backed by the Canadian government. While government bonds can have maturities ranging from 2 to 30 years, the 5-year bond is significant for Canadian homeowners with 5-year fixed-rate mortgages, as mortgage interest rates follow 5-year bond yields.
Bond yields directly affect borrowing costs, as yields with comparable maturities determine fixed-rate mortgages with the same term (e.g., 3-year bond yields set 3-year fixed rates). 5-year bond yields are also often used to gauge the state of the Canadian economy.
What Causes the 5-Year Bond Yield To Change?
The government sets a bond’s initial interest rate to incentivize purchases. However, bond yields are ultimately set by the market, which is influenced by domestic and international factors. Inflation expectations, monetary policy decisions, and economic indicators influence the direction of bond yields, which in turn move accordingly.
Inflation is the most significant influencer on bond yields. Bond yields tend to rise when inflation expectations exceed the 2% target and may fall when inflation is expected to be below the target.
Bond yields typically move in line with interest rates when monetary policy is implemented. When the central bank raises interest rates, bond yields usually increase. When the interest rate is lowered, bond yields may also decrease to reflect the lower cost of borrowing. GDP growth, employment data and other economic indicators can also impact bond yields. Since Canada is a close trading partner of the United States, Canadian bond yields are closely linked to changes in the US bond market.
Are Variable Mortgages Affected by 5-Year Bonds in Canada?
Variable mortgages are not affected by changes to 5-year bond yields. Instead, they are directly influenced by changes to the Prime Rate. Prime rates are set based on the Bank of Canada’s target to the overnight rate. When the Bank of Canada announces changes to its policy interest rate, the variable rate will increase or decrease alongside each announcement.
5-Year Bond Yield Forecast
In 2025, the 5-year Government of Canada bond yield traded within a relatively tight range, reflecting a market that spent most of the year waiting for clearer direction from inflation data and the Bank of Canada. The yield peaked at 3.28% in mid-January, then fell to 2.50% in early March, and stabilized for the remainder of the year without setting new highs or lows.
Looking ahead to 2026, the Bank of Canada’s latest Market Participants Survey shows a median forecast of 3.00% for the 5-year bond yield by year-end, with estimates clustering between 2.80% and 3.10%. That suggests markets expect policy rates to normalize. Slower economic growth and cooling inflation should limit bond yield movements, but uncertainty around US trade and fiscal policy could keep yields from drifting much lower.
Stable bond yields generally translate into more predictable fixed-rate pricing, helping homebuyers plan with greater confidence and reducing the risk of sudden rate spikes. Mortgage renewers may benefit from lower volatility than in recent years, while homeowners looking to refinance could find opportunities if yields remain near the lower end of the forecast range. Without a sustained decline in bond yields, 5-year fixed mortgage rates are unlikely to fall enough to materially affect affordability.
Frequently Asked Questions (FAQ) on Government of Canada (GoC) Bond Yields
How do Government bond yields relate to mortgage rates?
In simple terms, fixed mortgage rates follow bond yields, with a spread of around 1-2% added to cover the lender’s risk. Consequently, if the current 5-year bond yield is 2.5%, we can expect fixed mortgage rates to be around 3.5-4.5%.
How do bond yields affect mortgage rates?
Bonds, specifically Canada Mortgage Bonds (CMBs), are considered mortgage-backed securities (MBS). Bonds are debt securities issued by governments, such as the Government of Canada, to fund growth and projects, including homebuilding and homebuying activity. Institutional investors and pension funds purchase government bonds and receive interest payments until maturity.
If interest rates rise in Canada, bond prices usually fall, even if coupon rates remain unchanged, leading to higher bond yields. On the other hand, if interest rates in Canada decline, bond prices typically rise while coupon rates remain constant, resulting in lower yields on those bonds.
The 5-year fixed mortgage rates in Canada follow 5-year Canadian bond yields plus a spread set by the banks. Bond yields can shift direction based on market sentiment and economic factors, such as inflation and employment. While this won’t change your rate if you’re already locked into a 5-year fixed rate, it can change interest rates for new 5-year fixed mortgages. Mortgage rates follow bond yields, with an additional 1-2% spread to cover lenders’ risk premium and funding costs.
What is an inverted yield curve?
An inverted yield curve slopes downward, indicating that short-term interest rates exceed long-term rates. Such a yield curve typically reflects periods of economic recession, when investors expect yields on longer-maturity bonds to be lower. Many developed economies, including Canada’s, are experiencing an inverted curve on their government bond yields.
Canada’s 10-year and 2-year government bonds currently have a negative spread. This spread indicates the variation in interest rates between long-term and short-term government debt. Typically, long-term interest rates should be higher than short-term rates, which is a positive sign for a stable or growing economy.
How has the inverted yield curve affected Canada’s mortgage market?
In 2022, Canada’s yield curve inverted, with short-term government bonds yielding more than long-term bonds. This led to higher mortgage interest rates, as mortgage rates follow bond yields.
The Bank of Canada sets only short-term interest rates(target to the overnight policy) in Canada. It does not influence long-term rates, which are driven by bond supply and demand. When bond yields rise due to changes in bond prices, funding mortgages becomes more costly for lenders, prompting them to raise their advertised rates to maintain profitability.
How are Government of Canada Bonds issued?
The Government of Canada issues fixed-income securities, such as bonds, in certificate form through securities auctions. You can typically purchase government bonds from any Canadian Big Bank or investment institution or through a broker. The Canadian government issues bonds continuously and sets rates based on current economic conditions.
Should I get a fixed-rate mortgage if rates continue to rise?
Since fixed-rate mortgages generally follow the bond yield curve, it may be advisable to lock in a rate before rates rise further if yields are expected to increase.
As a general rule of thumb, if you’re ready to get a fixed-rate mortgage, it’s always a good idea to lock into a lower rate when you know rates will likely continue to climb. The best place to start is by exploring the available fixed-rate mortgages in Canada and determining what you qualify for.
Final Thoughts
Bonds are financial instruments that governments use to help raise capital to operate or fund infrastructure growth. They’re considered low-risk, secure investments because they pay a fixed rate of return for their duration and are backed by the government.
Bonds also offer liquidity, as they can be easily bought and sold in secondary markets. Understanding how bond yields affect mortgage rates is helpful, as the two are closely related.
If you’re ready to renew, refinance or purchase a new home, reach out to nesto mortgage experts to understand how volatility in bond yields can impact your mortgage strategy.
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