The 5-year Government of Canada bond is a low-risk investment available to Canadians, so low risk that it is also called a security. The Canadian government backs bonds, and the coupon yield is returned regularly at a set percentage of the bond’s face value. 

In this article, we cover what a government bond is, the factors that determine bond yields, why the 5-year bond is essential and how it affects mortgage rates in Canada.

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Key Takeaways

• Bonds are debt instruments that the Canadian government offers to help raise money to operate and invest in public projects.
• Bonds are bought for a set price and repaid in full when the bond matures. They also pay out regularly at a set interest rate, known as the coupon yield of a bond.
• A bond’s yield measures the value it produces throughout its lifetime.
• 5-Year fixed-rate mortgages generally follow 5-year government bonds, with an additional 1-2% spread on top of the bond yield.

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Canada 5-Year Bond Yield

Bank of Canada 5-Year Bond Yield Explained

What is a Government Bond?

A government bond is a security, which means the buyer is lending the government money in return for a guarantee that the face value will be repaid when the bond matures. Government bonds exist to help the government pay for its operations and to cover any deficits in its budgets at year’s end. Bonds are considered secure investments, particularly in Canada, as the government is unlikely to default on a bond repayment.

What is a Government Bond Yield?

The buyer will receive interest payments on the money they have loaned the government for the duration of the bond’s term (e.g. 5 years). Yield is the annual bond’s return, calculated as a simple coupon yield (a set percentage of the bond’s face value paid at regular time intervals, e.g. 10% a year) or the more complex yield to maturity (YTM). 

Unlike coupon yield, a bond’s YTM is the sum of all the interest payments you would receive throughout the bond’s lifetime and any gains or losses depending on whether you bought the bond at a discount or a premium. This gives an overall view of the bond’s lifetime yield.

For example, if you bought a bond at a face value of $1,000, with a 20% coupon, you would be paid $200 a year every year until the bond matured, at this point, you would also be repaid the bond’s face value ($1,000). 

However, if you sold the bond, its price may have changed. If the bond is now worth $800, it sells at a discount. Likewise, at $1,200, the bond would sell at a premium. However, the coupon percentage remains the same. 

The bond buyer, whether they purchased it at $800 or $1,200, would still receive $200 a year based on the bond’s original face value. The bond yield will have changed based on the coupon amount as a proportion of the new selling price. If you sell the bond for $800, the new yield is 25% ($200/$800).

If all this sounds complicated, don’t worry. The main thing to remember is that a bond creates value over its lifetime until it matures, and the yield measures how much value it creates.

Why Does the 5-Year Bond Yield Matter?

Bond yields are considered among the safest investments because the Canadian government backs them. While government bonds’ maturity can range from 2 to 30 years, the 5-year bond is significant for Canadian homeowners holding 5-year fixed-rate mortgages since mortgage interest rates follow 5-year bond yields.

Bond yields directly impact borrowing costs as yields with comparable terms determine fixed-rate mortgages with the same term (ex., 3-year bond yields determine 3-year fixed rates). 5-year bond yields are also a tool often used to measure the state of the Canadian economy.

What Causes the 5-Year Bond Yield To Change?

The government sets the initial interest rate of a bond to incentivize bond purchases. However, when discussing bond yields, the market ultimately determines the yield, which is influenced by several domestic and international factors. Inflation expectations, monetary policy decisions, and economic indicators affect the direction of bond yields, causing them to change in response. 

Inflation is the most significant influencer on bond yields. Bond yields tend to increase when inflation expectations rise above the set 2% target and may fall if inflation is expected to be below the target. 

Bond yields usually follow the direction of interest rates when monetary policy is implemented. When the central bank raises interest rates, bond yields typically increase. When the interest rate is lowered, bond yields may also decrease to reflect the lower cost of borrowing. 

GDP growth, employment data and other economic indicators can also impact bond yields. Since Canada is a close trading partner with the United States, Canadian bond yields are also closely linked to any changes in the US bond markets.

Are Variable Mortgages Affected by 5-Year Bonds in Canada?

Variable mortgages are not affected by changes to 5-year bond yields. Instead, they are directly influenced by changes to your lender’s prime rate. Prime rates are set based on the Bank of Canada’s target for the overnight rate. When the Bank of Canada announces changes to its policy interest rate, interest rates for variable mortgages will be adjusted with each announcement.

5-Year Bond Yield Forecast

As of late April 2025, the 5-year Government of Canada bond yield is around 2.76%. This marks a notable drop from its peak of 3.86% in 2024. This decline is a sign of easing inflation pressures and hints at ongoing adjustments in the Bank of Canada’s monetary policy.

According to the Bank of Canada’s recent Market Participants Survey, the median forecast for the end of 2025 is 2.80%, with some estimates dipping as low as 2.50%. Similarly, TD Economics expects the yield to be around 2.84% in the second quarter of 2025, stabilizing close to 2.75% by the end of the year.

This drop in bond yields will impact 5-year fixed mortgage rates, which could create more favourable borrowing conditions for Canadians. However, factors like US trade policies, economy and debt levels, alongside Canada’s domestic fiscal decisions, might introduce some volatility, and we could see bond yields rise. So, if you’re considering purchasing, renewing, or refinancing in the next four months, it’s wise to consider locking in your rate.

Frequently Asked Questions (FAQ) on Government of Canada (GoC) Bond Yields

Bond yields can be confusing at first. To help you understand the concept, we’ve put together a list of the most frequent questions people ask about bonds, bond yields and how they relate to mortgage rates in Canada.

Final Thoughts

Bonds are financial instruments governments use to help raise money to operate or fund infrastructure growth. They’re considered low-risk and secure investments since they pay a fixed rate of return throughout their lifetime and are backed by the government.

Bonds also offer liquidity as an investment since they can be easily bought and sold on secondary markets. Knowing how bond yields affect mortgage rates is helpful since the two are closely related.

If you’re borrowing money for a mortgage, it helps to lock into a lower interest rate early, especially when rates have been consistently low for a long time and have started to increase.

If you’re ready to renew, refinance or purchase a new home, reach out to nesto mortgage experts to understand how volatility in bond yields can impact your mortgage strategy.

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