Just two months ago, rates had fallen sharply following a plunge in bond yields driven by U.S. tariff concerns.

Canada’s 5-year fixed-mortgage rates are closely tied to the country’s 5-year bond yield, which in turn is influenced by the U.S. 10-year Treasury. That means domestic mortgage rates are often shaped more by global forces than by local economic conditions.

“What influences the 5-year government of Canada bond is not necessarily what’s happening in Canada; it is, in many cases, the yield on the 10-year U.S. Treasury,” Bruno Valko, VP of National Sales at RMG, told Canadian Mortgage Trends. “And there’s so many things that can influence the US 10-year.”

In early April, the U.S. 10-year Treasury dropped below 4%, but now it’s back above 4.5%. During that time, Canada’s 5-year bond yield also increased from a low of around 2.50% to 2.85% as of today — and fixed mortgage rates have moved in step.

The rise in bond yields has already led some of the big banks to adjust their rates. CIBC and RBC have each raised their five-year fixed rates by about 10 basis points, including on high-ratio options. TD also hiked select terms as well, bumping its 3-year rate by 10 bps and its 5-year fixed rates by 15 bps.

Scotiabank, on the other hand, is going against the trend. It’s lowered several of its posted special rates and eHome digital rates, with some cuts as steep as 90 basis points on its 1-year term and 60 bps on the 2-year eHome rate.

What’s driving the bond and mortgage markets?

As noted above, much of the recent movement in Canadian mortgage rates has little to do with domestic data. Instead, it’s being driven by developments in the U.S. economy — and how investors interpret them.

Those factors, according to Valko, can include some of the more obvious economic indicators — like inflation, interest rates, employment and investor confidence in the economy.

For example, the 10-year Treasury yield jumped earlier this week after it was reported that inflation had cooled in the United States, fuelling speculation of a rate cut later this year.

The Treasury market, however, is also influenced by less obvious factors, like investor confidence, the country’s deficit, and fears of “stagflation,” which occurs when high inflation and stagnant economic growth coincides with high unemployment.

“The number one fear right now in the United States is the risk of stagflation,” Valko says. “I’m not saying stagflation is going to happen, but there are some concerns out there that it might, and it hasn’t happened in the United States for 50 years.”

Economic uncertainty driven by unpredictable tariff policies may also be causing foreign buyers to buy less American Treasuries, which could be pushing yields higher.

“There’s been some speculation that foreign countries are reducing their purchases of Treasuries and instead potentially buying gold,” Valko added. “If you have fewer customers for Treasuries, especially a huge customer like China, yields will go up, because the Treasury department needs to attract more buyers and may have to lower prices to do so, which increases yields.”

Another factor at play is the roughly $7 trillion in U.S. Treasuries maturing this year — a massive refinancing task that could put additional upward pressure on yields if demand softens, Valko adds.

“Those Treasuries have to be refinanced, and if you increase the supply you may need to decrease the price, because there may be a reduced appetite to purchase all of those Treasuries.”

What it all means for Canadian mortgage holders

The high level of volatility south of the border means even the most well-informed forecasts come with a degree of uncertainty.

“[American Federal Reserve Chair] Jerome Powell doesn’t appear certain about interest rates because of the impact tariffs will have on growth and inflation,” says Valko. “So, how certain can we be that your variable mortgage will come down when the Fed isn’t necessarily certain about rates?”

As a result, Valko advises risk-averse mortgage buyers who can afford the current rate to strongly consider a 5-year fixed product and enjoy the peace of mind that comes with having a consistent payment schedule.

At the same time, Valko and others will be watching some key indicators that could offer a clearer picture of the Bank of Canada’s interest rate policy decisions in the coming days and weeks.

“Next Tuesday is the most important day, because we’ll be looking at our inflation numbers and [will see] if tariffs and retaliatory tariffs against the United States caused prices to go up, which would be a problem,” he says.

Inflation speculation

BMO Capital Markets senior economist Sal Guatieri, however, doesn’t anticipate a significantly higher number to appear on next week’s inflation report.

“We think inflation will probably stay pretty close to where it is now, which is close to the Central Bank’s 2% target for this year and next year, and… the Bank of Canada will likely resume cutting interest rates after pausing in April,” he said during the Canadian Alternative Mortgage Lenders Association conference in Toronto.

“We do expect it to resume cutting rates in June, and to cut rates [a total of] three times this year — and the market is pretty well in line with our view — so what that means is variable mortgage rates will probably come down further,” he added.

Ron Butler of Butler Mortgage tends to agree, suggesting that so long as fixed rates remain elevated, Canadian borrowers are better off taking a more flexible variable product and keeping an eye on the market.

“With the rates having crept over 4%, we have almost dead certainty that variable rates will continue to drop at some point — whether it’s on June 4 or the end of July, variable cuts will start again,” he says.

“There’s a chance that at some point before the end of the year we’ll have fixed rates back in the threes, so you can always lock in with your lender for free if that opportunity presents itself, and I think there’s a chance it will,” he added.

bond yields Bruno Valko fixed mortgage rate increases fixed mortgage rates fixed or variable ron butler sal guatieri treasuries variable mortgage rate variable rate mortgages variable rates

Last modified: May 14, 2025