Key Takeaways
- Canadian bond yields have pushed back toward recent highs.
- Despite a recent soft inflation report, concerns about the impact of higher energy prices remain.
- A rise in US bond yields is contributing to upward pressure on Canadian yields.
Canadian bond yields have pushed back to recent highs, and the catalyst is more than concerns about oil-driven inflation. Analysts say bonds are also being pushed higher by rising yields on US government bonds.
US Treasury yields have been climbing in 2026, thanks to a confluence of trends including the spike in oil prices, expectations of a Federal Reserve interest rate hike, and a ballooning government deficit. Yields have also risen among other key bond markets in the United Kingdom, across Europe, and in Japan. While these global dynamics are in play, the Bank of Canada is also seen potentially raising interest rates in 2026.
The impact on the Canadian market is evident across the spectrum of maturities. The yield on 10-year Government of Canada bonds has risen to 3.47% from 3.12% on Feb. 27, the day before the onset of the Iran war. Meanwhile, the yield on the 2-year government bond has climbed to 2.84% from 2.39%.
“Developed market bond yields have risen meaningfully … partly driven by investor concerns on rising and persistent inflation risks due to continued geopolitical uncertainty in the Middle East,” says Rachel Siu, managing director and head of Canadian fixed income strategy at BlackRock.
Yields Jump After Iran War Oil-Price Spike
Before the Iran war, bond yields had been falling. At the end of 2025, the 10-year yield was near 3.40%, but against the backdrop of a softening economy and the potential for a Bank of Canada rate cut in 2026, it had dropped to 3.12%.
Longer-term, Canadian yields have been trending lower since their post-pandemic peak of 4.95% for 2-year and 3.88% for 10-year bonds in September 2023, when the Bank of Canada ratcheted up interest rates to 5.00% from 4.25%. Since then, the central bank has lowered its policy rate to 2.25%. Bond yields followed suit until the Iran war drove them higher again. Amid the war, oil and gasoline prices spiked. Brent crude shot up to a high of over USD 114 per barrel in early May from roughly USD 71 before the war. It’s currently trading near USD 94.
The jump in bond yields takes them toward their highest level of the past two years, but they remain well below their 2023 peaks.
The move comes despite a softer-than-expected inflation reading in the April consumer price index report. CPI excluding food and energy decelerated to a 1.5% increase in April from 1.9% in March.
“The move in long-term yields is less about one CPI report and more about the compensation investors now want for owning [longer-term bonds],” says Dustin Reid, chief fixed income strategist at Mackenzie Investments.
Markets remain wary of the Iran war-related energy inflation spilling into the broader economy, says BlackRock’s Siu. “A prolonged energy price shock increases the risk of stickier inflationary pressures. Longer-dated sovereign debt faces upward pressure from rising term premia, reflecting the additional compensation required by investors to hold long-term debt.”
Against this backdrop, expectations for Bank of Canada policy have swung to rate hikes from cuts. “The longer the Strait of Hormuz remains closed and oil prices stay elevated, the greater the risk the Bank is forced to act by raising rates to guard against potential second-round inflation effects,” explains Thomas Ryan, economist at Capital Economics.
US Treasury Yields’ Influence on Canadian Bonds
More than domestic factors are driving Canadian bond yields higher. Similar dynamics for central bank rate expectations are playing out abroad. “Markets [are] now pricing roughly comparable tightening for the US Federal Reserve and the Bank of Canada, albeit spread out over a longer period of time for the Fed,” says Capital’s Ryan. At the same time, US Treasury bond yields have been rising. The yield on the 10-year Treasury is 4.46%, up from just below 4.00% before the war started.
“Government of Canada bonds still trade inside a North American and global framework, so higher Treasury yields naturally pull Canadian long yields higher,” says Mackenzie’s Reid.
Fiscal Concerns Fueling the Yield Spike
Another variable behind the surge in bond yields is the growing investor concern over rising deficits among the world’s major economies, according to BlackRock’s Siu. “Structural fiscal concerns in developed markets like the US and the UK have also increased interest rate volatility at the long end of the curve [long-term bonds] across sovereign bonds.”
To fund a sizable deficit, the government has to sell a large amount of new bonds, which causes supply to outstrip demand. This dynamic drags down bond prices, nudging yields higher, as the two move in opposite directions. Consequently, the market demands higher yields, “reflecting the additional compensation required by investors to hold long-term debt given fiscal concerns and additional supply,” Siu says.
What Do Higher Yields Mean for Markets?
There are real-world implications of higher yields and the resultant higher cost of borrowing. “We have seen an increase in yields across the yield curve, which would result in higher mortgage rates and rates on other loans if sustained,” says Vikram Rai, senior economist at TD Economics. The yield curve is a graphical representation of government-bond yields across different maturities, often between two- and 10-year bonds.
Higher mortgage rates crimp housing affordability and “hurt the real economy where it is most sensitive,” says Mackenzie’s Reid, referring to Canada’s slumping real estate market. Rising lending costs also weigh on corporations, as “refinancing gets more expensive and capital spending needs a higher hurdle rate [larger expected return on investment].” Yet there’s a silver lining to this scenario. “For investors, fixed income finally offers real income again,” says Reid.
