Global bond selloff pushes Canadian fixed mortgage rates higher

Canadian fixed mortgage rates are moving higher again as turmoil in global bond markets pushes the five-year Government of Canada yield toward a 12-month high.

The five-year yield was trading around 3.36% on Friday, up eight basis points from a week earlier and just three basis points below its 12-month high.

Lenders have responded by raising fixed mortgage rates, particularly on three- to five-year terms. Increases have generally ranged from 10 to 15 basis points, with some rates rising by as much as 20 basis points.

Canadian bond yields are heavily influenced by movements in U.S. Treasuries, where the 10-year yield has risen sharply in recent days. Inflation risks, strained market liquidity and growing government debt burdens have all contributed to the selloff.

A turbulent week for global bond markets

The already-fragile ceasefire between the United States and Iran expired Monday, with the two sides appearing further from a resolution. That added to inflation concerns stemming from the closure of the Strait of Hormuz and higher energy costs. President Donald Trump’s threat of “economic D-Day” against Iran late last week added to the instability

On Tuesday, the U.S. Treasury Department announced that the national debt had surpassed US$40 trillion for the first time. The government is now paying more than US$3 billion per day, or nearly US$100 billion per month, in interest. Against that backdrop, the 30-year Treasury yield reached 5.337%, its highest level since 2007.

Then on Wednesday, Treasury Secretary Scott Bessent announced that the Treasury would double a scheduled US$2-billion bond buyback in an effort to calm the market. The relief was short-lived: after falling below 5.2% on Thursday, the 10-year Treasury yield was back up to 5.277% by Friday afternoon.

“It didn’t work as well as he hoped, but the fact that he did it is a clear indication of a growing worldwide concern over the relentless increase in long-term bond yields, which is simply a function of uncontrollable deficits in multiple countries,” says Ron Butler of Butler Mortgage, noting similarly high debt levels in countries like France, the United Kingdom and Japan.

Tax cuts introduced under the Biden and Trump administrations, coupled with higher spending on infrastructure, pandemic stimulus and the war with Iran, have pushed U.S. debt into dangerous territory, Butler says. At the same time, attacks on oil refineries and other infrastructure in the Middle East and Russia are fuelling concerns about elevated energy prices and persistent global inflation.

“We are in a kind of a miniature version of a world war right now, with big powers pushing the buttons,” Butler says. “Nothing can push fixed rates down in the near term, because there’s no reason to think that Iranians are going to suddenly surrender or Ukrainians will stop blowing up Russian refineries and Russian oil shipment points.”

With bond-yield concerns and inflationary pressures dominating the headlines, RMG Mortgages vice-president of national sales Bruno Valko says policymakers will be keen to find solutions, but warns there is only so much they can do to reverse course.

“It’s good to see that the debt is in the news. It’s good to see that the Treasury in the United States is concerned about yields, and it’s on their radar. That’s the good news,” says Valko. “I can’t predict whether or not they’ll be successful in the future, but at least they’re working on it.”

What rising yields mean for mortgage rates

Fixed mortgage rates are being pulled higher by rising government bond yields, while variable mortgage rates remain stable, at least for now.

“On the variable side, the discounts are the same, but the fixed rates are going up,” Valko says. “You’re taking the risk of those rates potentially going up in the future, but even so, there’s enough of a buffer to allow for potentially three quarter-point increases from the Bank of Canada.”

Given the increase in fixed mortgage rates, Valko favours a variable rate for borrowers who can tolerate the uncertainty and have enough financial flexibility to manage potential payment increases.

“I’m in a variable personally, and if rates go up, I’m not going to be happy about it, but I can tolerate it,” he says. “I don’t lie awake at night worried at the Bank of Canada is going to increase rates because if they do, it’s not going to impact me so much, so it really comes down to risk tolerance, and your financial position.”

Butler, however, is more cautious about variable-rate mortgages. “The potential for Bank of Canada rate increases in 2027 is real,” he says.

Butler notes that the Bank of Canada estimates the neutral policy rate at between 2.25% and 2.75%, suggesting the current 2.25% rate may not hold if inflation continues to accelerate. He adds that if the Bank does begin raising rates, history suggests it is unlikely to stop after a single increase.

“If you see a fixed rate below 4.19%, below 4.10%, take it,” he advises. “The idea that we’ll get back to rates that start with a two is completely crazy. Even a three seems pretty doubtful for the rest of this year and most of next year.”

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