What’s keeping bond yields and fixed mortgage rates elevated
A weaker economy would normally be expected to pull bond yields—and fixed mortgage rates—lower. As Bruno Valko, RMG Mortgages’ vice-president of national sales and a longtime bond-market commentator, put it: “Bad economic news is usually good news for mortgage interest rates.”
During a recent webinar, Valko explained that slower growth typically increases demand for government bonds and makes central bank rate cuts more likely, putting downward pressure on yields.
But Valko, who also publishes the Morning Bru newsletter for mortgage brokers, said inflation, government borrowing and growing competition for investor capital are pulling yields in the opposite direction.
Global pressures on bond yields
Between Feb. 26 and Aug. 24, 2026, the 5-year Government of Canada bond yield rose from 2.72% to 3.28%, Valko noted. Over the same period, the U.S. 10-year Treasury yield climbed from 4% to 4.71%, while Japan’s 30-year yield rose from 3.37% to 4.06%.
Valko tied much of the increase to inflation concerns following the rise in oil prices. Higher inflation reduces the purchasing power of a bond’s fixed payments, leading investors to demand higher yields.
“Until we see these numbers come in and around that 2% mark, and we see some cooling of inflationary pressures, we can’t expect bond yields to come down if inflation remains elevated,” he said.
Canada’s headline inflation rate reached 3% in July, although the Bank of Canada’s CPI-median and CPI-trim measures were 2% and 1.9%, respectively. Valko said inflation pressures in the U.S. also matter for Canadian borrowers because the two countries’ bond yields tend to move closely together. “The bond market is global,” he said. “The United States usually sets the pace.”
Valko also pointed to the widening gap between short- and longer-term Canadian yields. The one-year Government of Canada yield was still around 2.67% in August, little changed from February 2025, while the five-year yield had risen about 66 basis points over that period, according to his presentation.
That put the five-year yield more than 60 basis points above the one-year after several years in which shorter-term yields had generally been higher. Valko said longer-term investors are looking for additional compensation for risks that include future inflation, interest-rate changes and uncertainty about the economy and government finances.
Government debt and investor competition
Valko focused heavily on government borrowing, arguing that greater bond issuance can push yields higher by forcing governments to offer investors a better return. Deficit spending can also contribute to inflation, he said.
“If we want lower rates, we need to accept that government spending and deficits are a significant factor in increased bond yields,” he said. “Not only do they increase the supply of bonds, they also fuel inflation. That’s a double whammy for rates.”
Governments are also competing for capital with corporations, including technology companies borrowing heavily to fund AI infrastructure and data centres, Valko said. He also pointed to a shift in the U.S. Treasury market, where private investors have taken on a larger role as central banks and foreign institutions account for a smaller share of demand.
“They’re profit-oriented, so they also have options with corporate bonds and mortgage debt,” he said. “They can buy private credit. They can buy all these different types of assets.”
Lower inflation, reduced expectations of central bank rate hikes and an easing of geopolitical and trade uncertainty could still bring yields down, Valko said. But many of those forces are outside Canada’s control.
“It seems like the entire world is running these massive deficits,” he said. “Because the bond market is global, I’m not so sure that even if Canada took care of [its] deficit spending that our bond yields would come down.”
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Last modified: September 8, 2026
