The Government of Canada 2-year yield closed at about 3.26% on October 1, according to Trading Economics, which is 101 basis points above the Bank of Canada policy rate of 2.25%. The 5-year yield, at 3.60%, is 135 basis points above it. When yields at the front of the curve sit this far above the overnight rate, the bond market is pricing a central bank that raises its rate rather than one that holds.
The central bank has not moved. It cut to 2.25% on October 29, 2025 and has held at each of the seven decisions since, most recently on September 2. Before that decision, markets priced a 94% probability of a hold. By September 18, traders priced the October 28 meeting as close to a coin flip, narrowly in favour of a hike, according to BNN Bloomberg.
The policy rate has been flat at 2.25% since October 2025, after 275 basis points of cuts from 5.00%, and the 2-year yield now sits 101 basis points above that flat line. The decision history since June 2024 shows how long the rate has stood still while the bond market moved away from it.
Each point is the target for the overnight rate after a Bank of Canada announcement, and the line holds flat between decisions. The 2-year yield is the October 1, 2026 close, drawn as a single level.
What Moved the Pricing: Oil and the Federal Reserve
Oil is the main driver. Claire Fan, senior economist at RBC, identified oil prices as the factor behind the October pricing, and the Bank of Canada summary of its September deliberations noted concern that global energy prices were staying higher for longer. Brent traded near $97 a barrel on October 1 with the Strait of Hormuz still restricted, according to Trading Economics.
The Federal Reserve raised its policy rate to 3.75% to 4.00% on September 16, its first increase since 2023, according to US Bank. Yields rose again on October 1, when the 10-year US Treasury touched 5.342%, its highest level since 2002, according to Reuters. A Canadian 2-year yield at 3.26% reflects both an inflation risk from energy at home and a global repricing of the rate path.
Why the Data Does Not Yet Force a Hike
The inflation data supports patience. Headline CPI was 3.0% in August, unchanged from July and at the top of the 1% to 3% control range, with gasoline up 22.8% from a year earlier, down from 25.7% in July. TD Economics reported that CPI-trim and CPI-median, the two core measures the Bank of Canada prefers, averaged 2.0%, unchanged from July, although core price pressures picked up to 2.7% on an annualized basis. Shelter inflation was 1.5%.
The labour market is softer. Canada lost 42,000 jobs in August against an expected gain of 15,000, the unemployment rate held at 6.4%, and annual wage growth slowed to 2.0%, the lowest since November 2017, according to BNN Bloomberg. RBC and Desjardins expect the Bank of Canada to hold through 2026 and begin raising rates in the first quarter of 2027. Capital Economics described no October hike as its base case, but a close call.
The Transmission to Fixed Mortgage Rates and the Dates Ahead
Fixed mortgage rates follow the 5-year Government of Canada yield, not the overnight rate, so the bond market has already tightened conditions for borrowers without a central bank decision. The 5-year yield is 0.88 percentage points above its level a year ago, according to Trading Economics. Variable-rate borrowers, whose rates follow the prime rate of 4.45%, according to Rates.ca, have not seen a change, and an October 28 hike would raise prime directly.
Three dates frame the path. September CPI is due October 19, the Bank of Canada announces its decision with a new Monetary Policy Report on October 28, and the final decision of 2026 follows on December 9. The CPI release is the last major inflation reading before October 28, and the two core measures matter more to the decision than the headline rate.