On the Radar: Canada Yields Stay Relatively Stable While U.S. And Japan Yield Curves Steepen

Capital Markets update
Jan 23, 2026

First National Financial LP

Key points

Over the past week, Canada’s curve moved higher, but much less than the U.S. and far less than Japan’s long end.
Japan is the epicenter of the move. Long Japanese Government Bond’s repriced sharply amid fiscal and political uncertainty, and that shock has been leaking into other long-bond markets.
The U.S. is dealing with its own mix of drivers: renewed geopolitical and tariff risk, equity volatility, and an institutional risk premium that has investors openly debating diversification away from U.S. assets.

The headline is not that Canada avoided a selloff. It didn’t. The point is that Canada absorbed a global rate shock with a smaller, smoother repricing, while the U.S. saw a larger move across the curve and long end, and Japan saw an outright long-end reset.

What happened this week?

This week has been a reminder that bond volatility is back, and it is not coming from just one place.

Japan’s government bond market has been hit by a sharp selloff, with investors repricing long-dated fiscal risk. The surge in Japanese yields, including a nearly 19 bp jump in 10-year JGB yields over two days and the biggest daily jump in 30-year yields since 2003, was tied to rising concern about fiscal stimulus and election-related policy promises.

At the same time, U.S. markets have been grappling with renewed geopolitical and tariff threats, which have pushed volatility higher. Reuters reported a jump in volatility measures as stocks, long-dated Treasuries, and the U.S. dollar sold off, consistent with a classic risk-off rotation and a broader “Sell America” narrative reappearing in price action.

In that context, it is not surprising that the long end has been the part of the curve that increased the most. Long bonds are where fiscal credibility, inflation uncertainty, and governance risk first appear.

Japan’s problem is the long end, and it is exporting volatility

Japan’s increase matters globally because it is not a routine 5–10 bp drift. It is a regime-style repricing of super-long paper.

It has been noted that buyers have been fleeing Japanese debt as political and fiscal narratives shifted quickly, and that the market is no longer treating super-long JGBs as “anchored.” In other words, the long end is being repriced more like a global fiscal-risk curve rather than a domestically managed, low-volatility asset.

That is exactly the kind of shock that can spill over. If Japanese yields become more competitive and perceived domestic risks rise, Japanese investors (historically large foreign buyers) may rebalance homeward, forcing repricing elsewhere.

The numbers reflect that spillover pattern: Japan’s 30-year yield rose 42 bps in one week, while the U.S. 30-year yield rose 12 bps and Canada’s 30-year yield rose only 7 bps.

The U.S. has both market volatility and an institutional risk premium

The U.S. yield increase this week is notable because it is not just a Japan spillover story. It also has its own domestic drivers.

First, equity and macro volatility rose sharply with tariff headlines and geopolitical tension. The equity volatility gauges climbed to an eight-week high, with risk assets pulling back and long-dated Treasuries selling off alongside the dollar. The media described investors dumping dollar assets due to prolonged uncertainty, strained alliances, and a loss of confidence, directly linking this to the return of the “Sell America” trade.

Second, and more structurally important, markets are increasingly forced to price governance risk. The bond rating organization Fitch’s warned that a major erosion of Federal Reserve independence would be credit negative for the U.S. rating, underscoring that the issue is not just politics, it is the perceived integrity of the policy framework that anchors long-term inflation expectations and term premia.

Third, this is no longer just “commentary.” Institutions are taking steps. The Swedish pension fund Alecta has sold most of its U.S. Treasury holdings over the last year, explicitly citing increased risk and the unpredictability of U.S. politics, as well as reduced policy predictability amid large budget deficits and rising government debt. Also, Denmark's AkademikerPension planned to sell its U.S. Treasury holdings by month-end, worth about $100M.

Those are not market-moving flows on their own. But they are important as signals: when credible allocators start treating U.S. sovereign duration as warranting a higher risk premium, the long bond reacts.

Why did Canada experience steadier bond yields?

Canada’s “resilience” this week shows up in two ways: smaller magnitude and less curve distortion. Canada enters volatile weeks with an advantage: it is still viewed as high-quality sovereign collateral. S&P affirmed Canada’s AAA rating with a stable outlook in May 2025. Moody’s has affirmed Canada’s AAA rating with a stable outlook as well. Fitch affirmed Canada at AA+ with a stable outlook in July 2025.

That rating stack matters in volatile markets because it reduces the need for investors to demand a sudden “governance premium” in yields. Canada is not immune to global term premium, but it is less exposed to a sudden credibility shock.

When investors want to diversify away from U.S. political or institutional risk, they need alternatives that are liquid enough to absorb allocation and high-quality enough to meet mandate constraints. Canada is one of the few markets that can plausibly play that role.

This was a major theme in On the Radar last week, where we discussed how weakening confidence in U.S. institutions could push global investors to diversify into other high-quality sovereign markets, including Canada, with the caveat that reallocations typically happen gradually rather than overnight. This week’s tape fits that framing: Canada did not rally, but it held together better as global volatility rose.

There is also evidence that demand for non-U.S. assets has been supporting activity in Canadian capital markets. Reuters reported that foreign issuers have been tapping the Canadian bond market as demand for non-U.S. assets grows, with “Maple” issuance being a preferred choice.

What does this mean for the Canadian Bond and Mortgage Market?

In last week’s post, we emphasized that Canadian fixed mortgage rates tend to follow Government of Canada yields, especially in the 5-year and 10-year sectors, plus lender spread. When rates are volatile, spreads can widen, hedging costs rise, and mortgage pricing becomes less predictable. Even if yields rise modestly, a calmer market remains helpful because it reduces the likelihood of a sudden repricing that forces lenders and borrowers to react.

Against that backdrop, Canada’s bond market looks resilient. Yields rose, but by less than the U.S., and dramatically less than Japan’s long end. The likely supports are straightforward: high sovereign credit quality, a relatively stable policy framework, and the fact that Canada is one of the few scalable alternatives when global allocators want to reduce U.S.-specific political and governance exposure.

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