The Government of Canada five-year benchmark yield closed at 3.63% on October 5, 96 basis points above its 2.67% close on February 27, the last session before the war began, while the Bank of Canada overnight rate has not moved from 2.25%. The two-year yield, at 3.26%, sits 101 basis points above that policy rate. The bond market has priced a tightening cycle that the central bank has not delivered.
Why Yields Rose on a Hold
The Bank of Canada held at 2.25% on September 2 and said that upside risks to its inflation forecast had increased. The two-year yield rose 10 basis points that day, from 3.01% to 3.11%, and the five-year rose 7 basis points to 3.42%. A hold that signals a bias to tighten is priced as a step toward a hike.
The rate has not changed since October 29, 2025. Market pricing for October 28 moved from a 94% probability of a hold before the September decision to close to a coin flip by September 22, according to BNN Bloomberg reporting carried by Yahoo Finance Canada. RBC senior economist Claire Fan named rising oil prices tied to the Iran conflict as the biggest factor. Capital Economics chief North America economist Stephen Brown wrote that the base case is no October hike, though it would likely be a close call, and Desjardins deputy chief economist Randall Bartlett expects a hold through 2026 and a first hike in the first quarter of 2027. Scotiabank economist Derek Holt wrote on September 10 that he expected 75 basis points of hikes between the fourth quarter and the first quarter.
The two-year yield has traded between 2.90% and 3.40% since August 21 while the overnight rate stayed at 2.25%, and the five-year yield peaked at 3.69% on September 23, 24 and 29 before easing to 3.63%.
The Bank of Canada held its overnight rate at 2.25% on Sep 2, and the two-year yield rose 10 basis points that day. The five-year yield closed at 2.67% on Feb 27, the last session before the war began.
The Headline and the Core Tell Different Stories
Statistics Canada reported on September 14 that the consumer price index rose 3.0% year over year in August, unchanged from July, with a monthly decline of 0.1%. Gasoline was up 22.8% from a year earlier. Excluding gasoline, inflation was 2.4%, up from 2.2% in July. The Bank of Canada preferred core measures were lower: CPI-trim at 1.9%, CPI-median at 2.0% and CPI-common at 2.6%. Headline inflation has risen from 1.8% in February to 3.0%, according to YCharts calculations from Statistics Canada data.
That split frames the October decision. A hike would respond to an energy shock that core measures show only partly passing into other prices, and it would land on a labour market where unemployment was 6.4% in August and employment fell by 41,700, according to Trading Economics figures for the Statistics Canada Labour Force Survey. The Bank has to decide whether the ex-gasoline acceleration from 2.2% to 2.4% is the start of pass-through or noise.
The Transmission to Mortgages
Fixed mortgage rates follow the five-year yield and variable rates follow the overnight rate, so the two have diverged. The five-year yield has already added 96 basis points since February 27. Variable-rate borrowers have felt nothing yet, and a 25 basis point hike would add $50 to $60 a month on a $400,000 variable mortgage, according to the BNN Bloomberg figures.
Senior Deputy Governor Carolyn Rogers said on October 1 in Victoria that the policy rate is too blunt a tool for housing affordability: "We set one interest rate for the whole economy." The calendar before the decision is fixed. The Labour Force Survey for September arrives Friday, October 9, at 8:30 am ET. The September consumer price index follows on October 19, nine days before the Bank of Canada announcement on October 28 at 9:45 am ET with a Monetary Policy Report. The Federal Reserve decides the same day at 2:00 pm ET.