Canada's 2035 Bond Auction Yields 3.164%: Navigating Trade Tensions and Monetary Policy Shifts

The Canadian government’s May 2025 auction of $5.25 billion in 2035-dated bonds settled at an average yield of 3.164%, reflecting a delicate balancing act between easing monetary policy and lingering inflationary pressures tied to U.S. trade disputes. This result sits near the midpoint of April’s volatile range, which saw yields swing between 2.95% and 3.5%, offering clues about where investors see risks and opportunities in the Canadian bond market.

The Recent Yield Volatility

The 3.164% yield marks a slight dip from April’s peak of 3.5%, which had spiked amid fears that U.S. tariffs on Canadian goods could stoke inflation. However, it remains above the March 2025 trough of 3.01%, underscoring investor caution about the durability of the Bank of Canada’s (BoC) rate-cutting cycle.

The BoC’s policy stance has been pivotal. After five rate cuts in 2025 totaling 50 basis points, the central bank’s policy rate now sits at 2.75%, with markets pricing in further reductions to a terminal range of 2.00%-2.25% by year-end. Yet, longer-term yields like the 10-year bond have resisted sharp declines, partly due to concerns that U.S. fiscal and trade policies could keep inflation elevated.

Geopolitical Risks and the Yield Curve

The auction result highlights the tension between short-term monetary easing and long-term inflation risks. While the BoC’s cuts have pushed short-term yields lower—evidenced by the 2.53%-2.56% range for the 2-year bond—the 10-year yield has remained stubbornly higher, reflecting a steepening yield curve. This dynamic suggests investors are pricing in a scenario where near-term growth slows (justifying rate cuts) but long-term inflation remains a threat.

Analysts like David Stonehouse of AGF Investments argue that the steepening curve is a “natural response” to the BoC’s easing offsetting tariff-driven inflation. Meanwhile, Carl Gomez of CoStar Group Canada warns that U.S. fiscal overhang and rising term premiums could push Canadian long-term yields even higher, potentially toward 3.7% by late 2025.

Why the 3.164% Outcome Matters

The auction’s 3.164% yield falls within the “Goldilocks” zone for Canadian policymakers: low enough to support borrowing but high enough to signal that inflation isn’t completely tamed. This midpoint reflects a market that’s neither fully embracing the BoC’s dovish stance nor panicking about tariffs.

Investors appear to be betting on a gradual resolution to trade disputes, with U.S. lawmakers under pressure to avoid a prolonged trade war. The $5.25 billion auction also saw solid demand, with bid-to-cover ratios exceeding expectations, suggesting that global investors remain attracted to Canadian debt despite the yield fluctuations.

Risks Ahead

Two key factors will determine whether yields stay near 3.164% or drift higher:
1. U.S. Trade Policy: If tariffs are rolled back, inflation pressures ease, and the BoC can cut rates further, pushing yields down.
2. Global Growth: A slowdown in the U.S. or China could depress commodity prices (a key Canadian economic pillar), intensifying the need for BoC easing.

Conclusion

The 3.164% yield on Canada’s 2035 bond auction is a snapshot of a market caught between two competing forces: the BoC’s efforts to stimulate growth and the unresolved threat of trade-driven inflation. With the 10-year yield hovering near 3.16%—well above its March low but below April’s peak—the data suggests a cautious optimism that policymakers can navigate these risks.

However, the path forward remains fraught. If U.S. tariffs persist, pushing inflation above the BoC’s 2% target, yields could rebound toward the 3.5%-3.7% range projected by analysts like Gomez. Conversely, a trade breakthrough or a more aggressive BoC easing cycle could drive yields lower. For now, Canadian bonds are stuck in a holding pattern, offering investors a glimpse into the fragile interplay between central bank policy and global geopolitics.

The numbers tell the story: with the BoC’s policy rate at 2.75% and long-term yields stuck above 3%, the market is pricing in a slow grind toward resolution—a grind that could last well into 2026.