On the Radar: A Tale of Two Curves: Rising Odds of a September BoC Cut as Long Yields Climb

Capital Markets update
Sep 5, 2025

First National Financial LP

Quick Takes:

Canada’s weak GDP and soft manufacturing data raised the odds to 50% of a September 17 BoC rate cut.
Global fiscal worries and heavy bond supply drove long-term yields higher, lifting Canadian borrowing costs in step.
Variable mortgage rates could ease if the BoC cuts, but fixed rates remain pressured by elevated long-end yields.

The first week of September delivered an unusual split in Canada’s rates market. Long-term borrowing costs jumped alongside a global sell-off in long-dated bonds, even as domestic data pushed traders to increase the odds of a Bank of Canada rate cut later this month. For mortgage borrowers and housing investors, this “two‑track” move matters. Fixed mortgage rates take their cues from government bond yields at the five‑year point and beyond, while variable rates move with the policy rate.

What changed at home

Canada’s second‑quarter GDP came in much weaker than expected, contracting at an annualized 1.6 percent. Exports fell sharply and business investment cooled, while household and government spending provided a limited offset. The miss was not a rounding error. It reset the growth narrative and revived talk of a near‑term policy response. By September 2, swaps were assigning roughly even odds to a Bank of Canada cut on September 17, up from about 40 percent before the GDP release.

Soft activity was not confined to the national accounts. Canada’s manufacturing PMI remained below the 50 threshold in August for a seventh straight month, with firms citing weak export demand and tariff effects. The index improved to 48.3 from 46.1, suggesting the pace of contraction eased. However, it still pointed to slack in goods‑producing industries, together with the GDP contraction, which kept the front end anchored to the idea that the next policy adjustment could be lower.

The Bank of Canada, for its part, has been patient but open‑ended. It held the overnight rate at 2.75 percent at its July 30 decision and acknowledged that second‑quarter output likely shrank. Since then, the realized data have undershot those projections, which helps explain why cut odds moved up even before the next meeting.

What changed globally

At the same time that Canada’s near‑term growth signals deteriorated, the global market delivered a different message on longer‑term rates. Investors demanded more compensation to hold long‑dated government debt. Yields on 30‑year bonds in the United States, the United Kingdom, and Japan pushed toward multi‑year or record highs. In Britain, the 30‑year gilt briefly hit levels last seen in 1998. In Japan, the 30-year JGB rose to an all-time high near the mid-three percent area. Gold set a fresh record as investors sought alternative havens. The common thread was fiscal anxiety and heavy sovereign supply, amplified by lingering inflation risk and unease about central‑bank independence.

Those same forces washed up in Canada. On September 2, the 10‑year Government of Canada yield moved higher in step with global peers, lifting long borrowing costs even as the probability of a policy cut rose. That is the essence of the split: global term premiums are pushing long rates up, while domestic data are pulling the short end down.

Borrowers Caught Between Two Curves

Regulation adds another layer for single-family and condo mortgages under OSFI’s Guideline B-20. Federally regulated lenders must apply the minimum qualifying rate, often called the stress test, to most uninsured residential borrowers. These borrowers have to qualify at the higher of 5.25 percent or the contract rate plus two percentage points. Insured borrowers face a comparable test under federal rules, which means the hurdle is nearly universal across the retail market.

It is important to be clear that B-20 applies only to residential retail lending. The framework does not extend to commercial credit, so there is no stress test applied to multifamily term loans. These loans are underwritten on property income, debt-service coverage, and loan-to-value, not a retail stress-test formula.

Renewals have their own rules. If a borrower renews with the same lender, the stress test generally does not apply. Since November 2024, OSFI has also removed the requirement for the set minimum qualifying rate to be used on uninsured straight-switch renewals between federally regulated lenders, provided the loan amount and amortization do not change.

These rules make the level of five-year fixed contract rates especially important for first-time buyers and move-up households. If five-year yields rise while the Bank of Canada cuts the policy rate, the qualifying rate may not fall much for fixed mortgages. That can limit affordability gains and keep the stress test binding. Bank of Canada analysis also shows that about 60 percent of household mortgage holders renewing in 2025 and 2026 will face higher payments than they did in late 2024, which means even small moves in long yields can matter for cash-flow math at renewal.

For multifamily clients, the takeaway is different. Multifamily loans are commercial credits, and decisions between fixed and floating should continue to follow property strategy and risk management rather than any retail stress-test requirement. Still, the rules matter indirectly. Strength in the single-family and condo markets influences demand for rentals, and many multifamily owners are also active as condo or subdivision builders.

How we got here

Three forces converged to lift long‑dated yields into early September.

First, fiscal supply. Across advanced economies, budget deficits remain large and issuance heavy. Investors demanded a higher term premium to absorb that supply, most visibly at the super‑long end. That shift was stark in global headlines this week, with thirty‑year yields testing multi‑decade highs in the United Kingdom and setting records in Japan. Canada’s long bonds did not move in isolation; they repriced with the pack.

Second, inflation risk is even if it cools. Headline and core measures have decelerated from their peaks, but oil near the mid‑sixties and ongoing tariff frictions complicate the path back to target. Markets therefore doubt that central banks will cut policy rates back to pre‑pandemic floors. That skepticism lifts the expected average policy rate over the life of a ten‑year or thirty‑year bond and shows up as higher yields. The latest U.S. manufacturing and labor data speak to growth risks, but the day‑to‑day flow has not been enough to overpower the term‑premium story.

Third, policy and politics. Investors watch central‑bank independence and political pressure closely. Debate around tariffs, budget timing, and appointments can bleed into market pricing when it affects inflation trajectories or debt supply.

What this means now

For borrowers, the message is straightforward. If the Bank of Canada cuts on September 17, variable rates should ease. If global long‑term yields remain elevated, five‑year fixed rates may not. That is the “tale of two curves” in practical terms. The cut helps households with floating‑rate loans and lines of credit. The global term‑premium story keeps pressure on fixed‑rate offers and on qualifying rates for new borrowers under OSFI’s rule.

For investors and housing professionals, watch three dials over the next two weeks. First, Canadian data. Any evidence that the GDP slump is broadening, or that hiring momentum is fading, will tilt the front end more dovish. Second, U.S. data and Fed guidance. If the Fed follows through on dovish signals and the labor data confirm slack, that will validate easing at the front end here and could, at the margin, pull down global yields: third, global supply and fiscal headlines. Auction results, budget chatter, and updated borrowing plans will steer the term‑premium narrative. If those remain heavy, long‑dated yields can stay high even as central banks trim policy rates.

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