On the Radar: What Is The Interest Rate Outlook After The Canadian Budget?

Four Takeaways

1. The budget lifts borrowing but keeps federal debt-to-GDP roughly in the low 40s, implying only modest pressure on mid- and long-term Government of Canada yields.
2. From 2026, the CMB cap rises to C$80B while Ottawa keeps its purchases at up to C$30B, directing more supply to private investors and supporting multi-unit housing.
3. Canada’s debt position was much worse in the 1990s, when debt-to-GDP topped 60 percent. It improved from 2000 to 2015, and although COVID reversed some of the gains, it is projected to hold near 43 percent over the next five years, with Canada expected to retain its AAA rating.
4. After the budget, rate futures put the chance of a 25bps cut on December 10 at 19 percent, down from 23 percent at the start of the week.

Ottawa tabled a budget that prioritizes investment and accepts a larger near-term deficit. Over the next five years, the plan allocates approximately C$280 billion across four key areas: C$115 billion for infrastructure, C$110 billion for productivity and competitiveness, C$30 billion for defence and security, and C$25 billion for housing. The released document also outlines a five-year program to identify approximately C$60 billion in savings, including a planned reduction in the size of the federal public service and tax integrity measures. Immigration targets are set to be trimmed beginning in 2026, legislation is forthcoming for open banking and stablecoins, and a C$2 billion Critical Minerals Sovereign Fund is proposed. 

Starting in 2026, the Canada Mortgage Bond annual issuance limit will rise from C$60 billion to C$80 billion, with the increase devoted to multi-unit rental housing. Ottawa will keep its own CMB purchases at up to C$30 billion per year so the added C$20 billion can be placed with private investors. The goal is to lower funding costs for lenders and support more apartment construction without changing the core federal bond totals.

The price tag shows up in the headline deficit. The budget projects a 2025–26 shortfall of C$78.3 billion, approximately double the amount from last year, with an operating balance target by 2028–29 and a declining deficit-to-GDP ratio as fiscal anchors.

Debt Management And Market Supply

Ottawa is maintaining this year’s bond program and signaling another large one for next year. In 2025–26 it plans to issue about C$609 billion in total, most of it to refinance maturing debt. The amount that actually adds to the debt is about C$138 billion for the year. That covers roughly C$78 billion for the deficit and the rest for other financial requirements like loans and investments. Within the bond program for 2025–26, issuance is split around C$120 billion in 2-year bonds, C$84 billion in 5-year, C$84 billion in 10-year, and C$24 billion in 30-year bonds, plus about C$291 to C$293 billion in treasury bills.

For 2026–27 the plan points to about C$589 billion in total issuance, including C$298 billion in bonds and about C$291 billion in bills. Net new borrowing is about C$149 billion. That includes an expected deficit near C$65 billion and about C$30 billion to purchase Canada Mortgage Bonds, with the balance for other financial transactions. To accommodate higher borrowing and refinancing, the government also intends to raise the Borrowing Authority Act ceiling, which is the legal cap on federal borrowing.

The higher CMB cap sits outside the GoC bond program, but it lifts mortgage-bond supply to the private market from 2026, which should help funding conditions for multi-unit projects.

Where Canada Stands On Debt To GDP?

Looking ahead, the new budget projects the federal debt-to-GDP ratio to rise from 41.2 percent in 2024–25 to 42.4 percent in 2025–26, then remain in a tight range of 43.1 to 43.3 percent through 2028–29, before edging back to 43.1 percent by 2029–30. Over the same horizon the deficit narrows from 2.5 percent of GDP to 1.5 percent. In plain terms, the debt ratio is expected to stabilize at around 43 percent, unless growth and revenues outperform, in which case it may fall back to pre-pandemic lows. 

For the broader public sector, the IMF’s general-government net-debt track has Canada rising modestly from about 13.3 percent of GDP in 2025 to about 15.9 percent by 2030, which still leaves Canada at the bottom of the G7 on this metric. On the national-accounts basis used by Statistics Canada, general-government net debt including social security funds stood at 19.2 percent of GDP in Q1 2025, while the federal-only net-debt ratio was 32.1 percent. These series use different definitions, but they point to the same conclusion, the ratio drifts up a bit and remains manageable by international standards.

How Canada Compares To The United States?

Compared to the United States, Canada has a better net debt position. G7 tables compiled by Finance Canada and the IMF show that the United States has general-government net debt near the mid-90s percent of GDP in 2023, while Canada sits in the low teens on the same definition. On gross debt, both countries are above 100 percent, but the US sits higher and is projected to rise further this decade under current policies. The IMF’s latest outlook forecasts US public debt rising from approximately 122 percent of GDP in 2024 to around 143 percent by 2030, absent policy changes. Canada’s trajectory is flatter. This relative gap is a key reason why global investors typically demand a lower term premium for Canada than for the US, even when macroeconomic conditions are similar. 

Will Canada Keep Its AAA?

Barring a policy surprise, yes. Two of the big three agencies, S&P and Moody’s, have Canada at AAA/Aaa with stable outlooks as of this week. DBRS Morningstar is also AAA, while Fitch remains at AA+ with a stable outlook after its 2020 pandemic‑era downgrade. The budget’s Annex 4 repeats the same ratings mix. Agencies emphasize Canada’s institutional strength, diversified economy, and comparatively low net debt. A larger deficit does not, by itself, threaten the top ratings if the debt path remains contained and the economy stabilizes. 

What Does This Mean for The Overnight Rate?

The Bank of Canada cut the policy rate to 2.25 percent on October 29. The next decision is December 10. After the budget, rate futures now put the chance of a December cut at 19 percent, down from 23 percent at the start of the week. The budget’s fiscal support suggests a hold in the near term. The base case is the overnight rate remaining at 2.25 percent through year-end, with a mild easing bias into 2026 if growth remains soft and inflation is near its target.

What Will Be The Drivers For The Five And Ten-Year Government Of Canada Bonds Yields?

Five year

The five-year is more sensitive to the path the Bank of Canada signals over the next few quarters. When markets price a lower chance of near-term cuts, the five-year has less room to rally. Supply matters too. Ottawa plans a large amount of five-year issuance this fiscal year, with another sizable program next year, and provinces are active as well.

The five plan also takes its cue from the United States. Moves in U.S. rates and global term premia often pass through to Canada. Domestic data are the other lever. Monthly CPI, wages, and growth surprises, plus Bank of Canada guidance and balance sheet actions, can shift five-year yields quickly. Mortgage related flows and bank asset liability management add a steady bid at times, but auction timing and dealer balance sheets can still move pricing around auctions.

Ten year

The ten-year is driven more by global forces than by the next policy meeting. The key drivers are the global term premium, long run inflation expectations, and the supply mix. Canada is issuing a sizable amount of ten year bonds this year and next, which keeps the benchmark liquid and limits scarcity effects. Pension and insurer demand can offset supply when funded status improves, while foreign demand is affected by currency hedging costs and the Canada-U.S. spread.

Why The Debt Story Is Not The 1990s All Over Again

The 1990s debt repair began from a much worse starting point, with net debt above 60 percent of GDP and public debt charges routinely above 5 percent of GDP. Today, even after higher rates, Ottawa projects public debt charges of about 1.8 percent of GDP in 2025–26, still below the 40‑year average of 3.2 percent. Canada’s net debt ratio is the lowest in the G7 on the standard IMF and national accounts definitions that net out pension assets. That does not mean fiscal choices are costless. It does mean the baseline is much more resilient than three decades ago. 

Risks To Watch

The big swing factors are external. US policy and growth drive Canada’s exports and its yield curve. If US rates rise due to persistent inflation or increased Treasury supply, Canada will import higher yields. Conversely, a US slowdown would pull Canadian yields down. Domestic risks include the execution of the infrastructure buildout, defence procurement timelines, and whether the productivity agenda actually lifts private investment.

On the fiscal side, the government will raise the Borrowing Authority Act limit and continue to purchase a significant amount of Canada Mortgage Bonds. If private demand weakens, Ottawa’s support could shift more borrowing into 2-, 5-, and 10-year bonds, briefly straining dealers’ capacity, which could push yields up slightly.

Bottom line

Ottawa’s larger deficit raises borrowing, but debt to GDP is expected to hover near 43 percent over the next five years, and Canada should retain its AAA rating, which helps keep term premia contained. After the budget, rate futures indicate a 19 percent chance of a December 10 cut, down from 23 percent at the start of the week, suggesting that the overnight rate is likely to remain at 2.25 percent. Five- and ten-year Government of Canada yields should trade sideways to slightly higher as heavy issuance meets solid demand, and global moves, led by US rates, driving the curve.