Canada's long-term government bond yields are closely tied to U.S. Treasury yields, according to the Bank of Canada. Recent market rallies following a potential Middle East peace deal have lowered yields globally, but long-term rates remain elevated due to persistent fiscal and geopolitical pressures.
Term Premiums at Decade Highs
The average 10- and 30-year borrowing cost for G7 countries ended April at a 17-year high, as noted by National Bank of Canada strategists Kyle Dahms and Taylor Schleich. They warn that even with a permanent de-escalation, the risk of high long-term yields remains significant. Term premiums—the extra compensation investors demand for holding long-term government bonds—are a key factor, driven by concerns over rising public debt.
Debt and Geopolitical Risks
The pandemic initially raised public debt levels, but subsequent shocks, including trade wars and the Middle East conflict, have further increased borrowing needs. Higher military spending has also contributed. Governments across advanced economies are issuing large volumes of long-term bonds, but market participants are uneasy about absorbing this supply. During the pandemic, central banks bought significant shares of new issuance, keeping yields low. Now, these programs have ended, and some central banks are selling bonds, requiring private investors to step in at higher compensation rates.
Impact on Canadians
While Canada's inflation and fiscal balance sheet are relatively strong, the country is not immune to global pressures. The Bank of Canada notes that long-term government bond yields directly influence mortgage and business loan rates. As term premiums rise, Canadians face higher costs on credit cards and mortgages, which in turn drags on the economy. The term premium for 10-year government bonds has not been this high in over a decade, signaling ongoing financial strain for households and businesses.
