The world’s anchor bond just hit 3%. Your mortgage renewal noticed.

This is the end of an assumption, not the start of a crisis. We expect the Canadian 5-year yield to hold in the low-3% range through the fall, and we think the Bank of Canada’s next move is now more likely a hike than a cut, though not before it sees whether oil-driven inflation is spreading into core.

Why we think so. The assumption that ended this week is that borrowing gets cheaper over time. It held from the early 1990s until 2021, and a generation of Canadian financial plans, mortgage renewals, leveraged investment strategies and business expansion timelines were built on it. On Tuesday 1 September three forces pushed against it at once. Oil rose back above US$90 after fresh U.S. strikes on Iran and attempted Iranian attacks on shipping in the Strait of Hormuz. Eurozone inflation came in above 3% for August, and markets moved to price a European Central Bank rate increase this month. And governments keep borrowing: U.S. federal debt passed US$40 trillion, and Japan carries the developed world’s largest debt load. Japan’s 10-year yield reached 3.0%, a level last seen in 1996, and that matters more than it sounds. For three decades Japanese savers, pension funds and insurers held trillions in bonds abroad because their own bonds paid nothing. At 3% at home, that money has a reason to go home, and less foreign demand for U.S., European and Canadian bonds means higher yields here. That pressure is slow and structural, and it outlasts any single week’s headlines. Inflation worries, fiscal supply and Japan’s shift do not reverse on one data point, which is why we expect yields to stay where they are rather than retreat.

How this has played out before. Yields of 3% in Canada and 4.8% in the United States are not historically high; they are historically ordinary. The Canadian 5-year was roughly 5% to 8% through the 1990s and 3% to 5% in the 2000s, then under 2% for most of 2010 to 2021, briefly below 0.5% in 2020. At about 3.4% now, today’s level is the 2000s, not the 1980s. What ended was the period when rates were extraordinary. There is a fair counter-argument: bond sell-offs of this kind have reversed quickly before. In 2023, yields peaked in October and fell a full point by year-end as inflation cooled. We lean against a repeat, because this time the drivers include government borrowing and Japan’s structural shift, but it is the scenario we are watching.

What it means. The key point for households is that the Bank of Canada sets only one rate, the overnight rate, which drives variable mortgages and lines of credit. The rate on a five-year fixed mortgage, a GIC or a corporate bond is set by the bond marketBond yield The annual return an investor gets for lending to a government or company through a bond. Yields rise when bond prices fall. Fixed mortgage rates are priced from the 5-year Government of Canada yield.. Banks fund five-year fixed mortgages at a cost anchored to the 5-year Government of Canada yield, which closed at 3.35% on Tuesday, and add a spread, historically 1 to 2 percentage points, which is how this week’s quotes of 4.1% to 4.3% arise. On the variable side, prime is 4.45%, so a prime-minus-1 mortgage is about 3.45%; a 25 basis point hike would take it to 3.70%, roughly $52 to $60 more a month on a $400,000 mortgage. Anyone renewing in the next twelve months should get the quote now and run the payment at today’s rate; the choice between fixed and variable is about how much certainty you are buying, not which is cheaper. A five-year fixed signed in 2021 at around 2% renews into a market where the underlying bond alone yields more than that. For investors, bond prices fall when yields rise: a bond fund with a durationDuration A measure of how much a bond or bond fund's price moves when interest rates change. A duration of 7 means roughly a 7% price fall for each one-point rise in yields. of 7 loses about 7% for each 1-percentage-point rise in yields, a short-duration fund about a third of that. Bonds and stocks fell together this week, as they did in 2022, because inflation is the worry, yet a bond bought today and held to maturity locks in the higher yield, and cash pays again. Businesses should re-run any expansion or equipment plan that assumed a lower cost of capital in 2027: if it only works with cheaper money, that is the finding. Leveraged strategies that borrow against an asset should be reviewed, not unwound.

What would change our mind. A ceasefire in the Gulf that takes oil back below US$80 and holds it there, or Canadian CPI ex-gasolineCPI ex-gasoline The Consumer Price Index with gasoline removed. When it sits well below the headline rate, the inflation is coming from fuel rather than from the broad economy. staying at 2.2% through October alongside a rising unemployment rate. Either would tell us the bond market has over-reached, and we would say so.

What to watch. Friday’s U.S. payrolls, where the consensus is +55,000 after a loss of 23,000; the price of oil and shipping through the Strait of Hormuz; the European Central Bank’s decision this month; and Canadian CPI ex-gasoline through October.