Yield Curve

A yield curve is a graph showing the yields on bonds of the same credit quality — in Canada, typically Government of Canada bonds — plotted against their time to maturity, usually from short maturities such as three-month Treasury bills out to thirty-year bonds. It is the market benchmark that shapes how lenders price fixed-rate mortgages.

How bond yields become mortgage rates

Fixed mortgage rates are not driven by the Bank of Canada's policy interest rate the way variable rates are. A lender generally funds fixed-rate loans through bond markets and prices them off a comparable Government of Canada bond yield — most often the five-year bond, because five-year fixed terms are common in Canada. The lender adds a credit spread to cover funding costs, overhead, and risk, then competes on price by discounting its posted rate. When the five-year yield moves, five-year fixed rates usually move the same way, though the pass-through is rarely exact.

Three common shapes

Normal: longer maturities yield more than shorter ones, compensating investors for tying up money for longer. This is the usual state.
Flat: short and long yields sit close together, often a transition point.
Inverted: short maturities yield more than long ones, which can appear when markets expect the policy rate to fall.

Why it matters to a borrower

The shape of the curve influences the gap between short and long fixed terms. When the curve is steep, a five-year fixed rate may be noticeably higher than a one- or two-year rate; when it is flat or inverted, shorter terms may carry little discount. That feeds into the choice between a fixed-rate mortgage and a variable-rate mortgage, since variable rates track the prime rate and the policy rate rather than bond yields. A term premium — the extra yield investors demand to hold longer maturities — is one driver of the curve's slope. Our guide to how mortgage rates work in Canada covers the full pricing chain.

What the curve does not tell you

The curve is a market snapshot, not a forecast and not a promise about where rates will go. Bond yields shift daily with inflation expectations, expectations for the policy rate, global demand for Canadian debt, and market liquidity. For qualification, federally regulated lenders follow OSFI Guideline B-20, and borrowers must pass the federal mortgage stress test by qualifying at a rate above their contract rate. Confirm current figures and rules with your lender.

Frequently asked questions

Which bond yield sets Canadian fixed mortgage rates?

Canadian lenders most often price five-year fixed mortgages off the Government of Canada five-year benchmark bond yield, because the five-year term is the most common fixed term. A lender then adds a spread and applies discounts to arrive at the rate offered to a borrower. Shorter and longer fixed terms are generally priced off bonds of a similar maturity.

What does an inverted yield curve mean for mortgage rates?

An inverted curve means short-term bond yields are higher than long-term yields. It often reflects an expectation that the policy rate will fall. For borrowers, it can mean shorter fixed terms are not much cheaper than longer ones, and that pricing across terms is unusually compressed. It does not directly set mortgage rates, and it is not a reliable forecast on its own.

Do fixed mortgage rates follow the Bank of Canada policy rate?

Not directly. Variable-rate mortgages track the prime rate, which moves with the Bank of Canada's policy interest rate. Fixed mortgage rates respond mainly to Government of Canada bond yields, especially the five-year yield. The two can move together or apart, depending on what bond markets expect about inflation and future policy decisions.