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5 Year Canadian Bond Yield: 3.94%

Canada’s 5-year bond yield is the basis for most long-term fixed mortgage rates. It’s a key benchmark in the Canadian bond market and fluctuates daily.

What is the 5-year bond yield?

The 5-year Government of Canada bond yield represents the return an investor gets by holding 5-year Canadian debt to maturity.

Because government bonds have the full faith and backing of the Canadian government, the 5-year Canadian bond is considered the safest Canadian investment with a 5-year term. Because of its risk-free status and high liquidity, it’s often used as a benchmark for other interest rates in Canada.

Why does the 5-year yield matter?

Fixed mortgage rates are based indirectly on government of Canada bond yields. That’s why the most popular mortgage term in Canada (the 5-year fixed) closely follows the 5-year bond yield. While it can deviate for short periods, the spread (difference) between 5-year yields and 5-year fixed rates always come back to their long-term average.

How is the 5-year Yield Set?

The government of Canada issues bonds with a set coupon. The market then dictates what those bonds are worth, thereby setting the yield in open market trading.

What Causes the 5-year Yield to Change?

Bond yields and bond prices have an inverse relationship.

When demand for bonds falls, bond prices fall. That causes bond yields to rise.

When demand for bonds rises, bond prices rise. That causes bond yields to fall.

The number one factor influencing demand for 5-year bonds is inflation. High inflation drives down the value of bonds and drives up their yields, and vice versa. High inflation usually accompanies an overheating economy.

The Bank of Canada has a 2% target for inflation. When inflation is expected to be materially above that target, yields typically rise. When inflation is expected to be materially below that target, yields typically fall.

Other things affecting bond demand (and yields) include:

  • Yields in other countries (Canadian yields are tightly correlated with yields in the United States since it’s a close trading partner)
  • Demand for safe investments versus higher-returning riskier investments (this can change rapidly during periods of market stress)
  • Worries about the Canadian government’s ability to pay its debts (and its credit rating)
  • The Bank of Canada’s monetary policy.

 

5-year Yield History

All-time high: 18.78% (September 1981)

All-time low: 0.276% (March 2020)

Canada 5-year Yield Forecast 2024

The median average forecast for the government of Canada 5-year yield is 2.90% by year-end 2024. That is 0.27 percentage points—i.e., 27 basis points—lower than it was at the end of 2023 (it closed 2023 at 3.17%).

The median forecast for year-end 2025 is 2.60%.

These forecasts are derived from the individual 5-year yield forecasts of Canada’s Big 6 banks, as of April 4, 2024, and are subject to change.

How Does the 5-year Yield Affect Fixed Mortgage Rates?

Discounted 5-year fixed rates are typically 150+ basis points above the 5-year yield. This “spread,” as it’s called, can vary anywhere from under 100 to over 200 in times of financial stress.

The 5-year fixed – 5-year yield spread if often narrowest in the busy spring market when mortgage competition is highest. It often inflates in the bank’s first quarter (November through January) when mortgage demand is the slowest.

Does the 5-year Yield Affect Variable Rates Too?

Lenders set variable rates as a discount to prime rate. Prime rate generally changes with the Bank of Canada’s overnight rate.

The 5-year yield does not directly impact variable rates but it does reflect market sentiment, which can presage changes in Canada’s overnight rate.

5-year Yield History

Historical data on Canada’s 5-year yield can be found on the Bank of Canada’s website, as can information on which 5-year bond comprises the current benchmark.