Want to Predict Fixed Mortgage Rates? Start With Bond Yields

Fixed mortgage rates in Canada don’t change randomly—they’re closely tied to something most homebuyers never look at: government bond yields. Understanding this connection gives you the power to predict rate changes and make smarter decisions, whether you’re renewing, refinancing, or buying a home.

Why Bond Yields Matter

The #1 signal for where fixed mortgage rates are headed is the 5-year Government of Canada bond yield. Why? Because this yield represents the cost for banks and lenders to access stable, low-risk funding for mortgage lending.

Example:
If the 5-year bond yield goes from 3.25% to 3.75%, mortgage lenders often raise 5-year fixed rates within days.
When yields drop, banks can lower rates and still maintain profit margins.

Historical Rate Trends

Here’s how bond yields and mortgage rates have moved together over the years:

Why Your Mortgage Depends on the Bond Market

Mortgage lenders want to make a profit. They have two options:

1. Invest in government bonds (safe, predictable return)

2. Lend to homeowners via mortgages (riskier, requires higher return)

If bond yields rise, lenders require higher mortgage rates to justify the additional risk of lending to borrowers instead of holding bonds.

Bond Yields, Explained Simply

Think of a bond like a loan you give the government. You get interest in return.

How Yield Works:

• Coupon rate: Fixed interest payment

• Market price: What investors are willing to pay

• Yield: Return based on market price

Example:
A $1,000 bond with a 3% coupon pays $30/year.
If the price drops to $950:
Yield = $30 ÷ $950 = 3.16%

Bond prices fall when inflation rises or rate hikes are expected. This increases yields, which then increase mortgage rates.

The Hidden Giant: Why Bonds Rule Over Stocks in Lending

While stock markets get the headlines, the bond market controls the flow of money in lending—including mortgages.

Market Size (2024 Estimates):

• Bond Market: $133 trillion

• Stock Market: $106 trillion

Because government bonds are considered risk-free, they set the base price of money. Mortgage pricing is layered on top of that base.

Why Fixed Rates Always Sit Above Bond Yields

Lenders price mortgages above bond yields because:

• They need to make a profit

• They face risk of borrower default

• They cover operating costs

The difference between the bond yield and the mortgage rate is called the “spread.”

What’s the Typical Gap Between Yields and Rates?

Spread = Mortgage Rate – Bond Yield

Historically, this spread ranges from 1.20% to 2.00% depending on market volatility and lender competition.

Typical Spread by Year:

The Real Reasons Lenders Add a Spread

The spread reflects more than just profit. It covers:

• Default Risk – The chance borrowers won’t repay

• Liquidity Premium – Compensation for less flexible assets

• Operational Costs – Staff, technology, infrastructure

• Regulatory Costs – Capital reserves and insurance

• Profit Margin – Return on lending

If risk increases (e.g. due to unemployment or inflation), lenders widen the spread.

Can the Bank of Canada Move Bond Yields?

Yes—but indirectly.

The BoC sets the overnight interest rate, which influences short-term lending. This doesn’t directly control long-term bond yields but it shapes investor expectations.

Example:

• BoC hints at future inflation

• Investors sell bonds, pushing prices down

• Yields rise → Mortgage rates rise

So while BoC affects variable rates more directly, its messaging plays a huge role in fixed-rate movement.

Why the 5-Year Yield Is the One to Watch

Most Canadian homeowners choose 5-year fixed terms because they offer rate stability.

Thus, the 5-year Government of Canada bond yield becomes the benchmark for 5-year fixed mortgages.

Watching it helps you:

• Predict rate hikes or drops

• Time your renewal or pre-approval

• Choose between fixed vs. variable

Bottom Line: Bonds Drive Mortgages

Whether you’re buying, renewing, or refinancing, watching bond yields gives you an edge. Here’s the logic:

• Bond Yield Up → Fixed Rates Up

• Bond Yield Down → Fixed Rates Down

Lenders adjust fast. You should too.

Today’s Fixed Mortgage Rates (May 2025)

Note: Rates vary based on credit score, property type, and down payment.

Rates on the Move? Let’s Talk Strategy

Don’t wait until rates rise to act. If bond yields are climbing, it may be time to lock in.

At RateShop.ca, we:

• Monitor bond yields daily

• Shop across 100+ lenders

• Customize rate timing for your unique case

Let’s talk strategy—before your mortgage gets more expensive.