Global Deficits and Inflation Fuel Rise in Bond Yields, Fixed Mortgage Rates

Bond yields and fixed mortgage rates in Canada have been elevated due to several factors. According to Bruno Valko, vice-president of national sales at RMG Mortgages, global deficits, inflation risks, and heavy bond issuance are contributing to this trend.

Valko notes that a weaker economy would normally lead to lower bond yields and fixed mortgage rates, as it increases demand for government bonds and makes central bank rate cuts more likely. However, the current situation is different.

The 5-year Government of Canada bond yield has risen from 2.72% to 3.28% between February 26 and August 24, 2026, while the U.S. 10-year Treasury yield climbed from 4% to 4.71%. Valko attributes this increase to inflation concerns following the rise in oil prices.

He emphasizes that until inflation numbers come down around the 2% mark, bond yields are unlikely to decrease if inflation remains elevated. Canada's headline inflation rate reached 3% in July, and Valko notes that U.S. inflation pressures also matter for Canadian borrowers due to the close relationship between the two countries' bond yields.

Valko also points out the widening gap between short- and longer-term Canadian yields, with the five-year yield being more than 60 basis points above the one-year after several years in which shorter-term yields were generally higher. He suggests that longer-term investors are seeking additional compensation for risks including future inflation, interest-rate changes, and uncertainty about the economy and government finances.