On the Radar: The Canadian Yield Curve Normalized After a Two-Year Inversion. What Does That Mean for Choosing Between a Five-Year and Ten-Year Fixed?

  • First National Financial LP

Quick Takes:

  1. The Government of Canada five-year to ten-year yield spread has been positive since July 2024 after a two-year inversion, sitting at 35 basis points this week with the five-year at 3.25% and the ten-year at 3.60%.
  2. A borrower choosing a five-year fixed today only beats the ten-year lock if the five-year GoC yield at renewal in 2031 is below 3.95%, which is 137 basis points above the 25-year average of 2.58%.
  3. History favours the shorter term, with the five-year-then-renew strategy beating the ten-year lock in roughly 80% of rolling periods since 2001, but that entire sample was shaped by a secular decline in rates that may not repeat.
  4. The Bank of Canada’s two-sided risk language and elevated oil prices mean the next five years could look very different from the last 25, narrowing the historical edge.

Canadian borrowers renewing or taking on a new mortgage this spring face a decision that gets less attention than it deserves: how long to lock in. Most default to the five-year fixed term, which has been the standard in Canadian lending for decades. But the yield curve has shifted in ways that make the ten-year option worth examining through the data.

Since July 2024, the Government of Canada five-year to ten-year yield spread has been positive after spending two full years inverted. That normalization signals that bond markets expect rates to stay elevated rather than fall sharply from here. What follows is not a recommendation for either term, but a walk through what 25 years of Canadian yield data actually shows.

Where Yields Sit Relative to 25 Years of History

The Bank of Canada publishes daily benchmark bond yields going back to 2001, covering two recessions, a pandemic, and three separate yield curve inversions. Over that full period, the average five-year GoC yield is 2.58 percent and the average ten-year yield is 3.01 percent, leaving an average spread of 43 basis points.

During that quarter-century, the spread inverted three times: briefly in 2007, again in mid-2019, and most recently from mid-2022 through mid-2024. Each inversion ended with rates moving sharply lower as the Bank of Canada eased policy. Since July 2024, however, the curve has been positive again, and that signals a different trajectory than the one borrowers grew accustomed to in the 2010s.

As of this week, the five-year GoC sits at 3.25 percent and the ten-year at 3.60 percent, with a spread of 35 basis points. Both yields are above their 25-year averages, but the spread itself is modestly below normal. That means the curve is positive, but not especially steep.

Because fixed mortgage rates follow GoC bond yields, the spread between these two benchmarks determines the premium for locking in an extra five years of rate certainty. At 35 basis points, that premium is narrower than what borrowers have typically paid over the past quarter-century.

The Break-Even Math That Changes the Conversation

The most useful way to evaluate the five-year versus ten-year decision is to calculate the break-even renewal rate. That is the five-year GoC yield that would need to exist in 2031 for the borrower who chose the shorter term to have paid less total interest over the decade.

Using this week’s benchmark yields, the break-even is 3.95 percent. If the five-year GoC is below 3.95 percent in 2031, the five-year-then-renew strategy wins. Above that threshold, the ten-year lock turns out to be the better call.

That 3.95 percent break-even sits 137 basis points above the 25-year average five-year yield of 2.58 percent. In other words, the borrower choosing five years today only comes out ahead if the renewal environment in 2031 is significantly worse than what has been normal since 2001. The implied forward rate from the current yield curve lands at almost exactly the same number, meaning bond markets themselves are pricing an elevated rate environment in five years, not a return to the lows of the 2010s.

Before the 2022 inflation shock, the five-year GoC had not stayed above 3.50 percent for any extended period since before the financial crisis. It reached that range again during the Bank of Canada’s hiking cycle but has since pulled back near 3.25 percent. Hitting the break-even of 3.95 percent in 2031 would require a return to the peak-stress conditions of 2023, not the more moderate levels that have prevailed since.

History Favours the Five-Year, but the Sample Has a Problem

If the break-even math favours the ten-year, history pushes back. Over rolling monthly start dates from 2001 through 2021, the five-year-then-renew strategy beat the ten-year lock in roughly 80 percent of periods, with a median advantage of 87 basis points.

That is a powerful track record, but it comes with an important caveat. The entire sample is dominated by a secular decline in interest rates, from a five-year GoC near 5 percent in 2001 to below 1 percent during the pandemic. That kind of sustained downward drift systematically rewards anyone who renews into lower rates.

Each of the three post-2001 yield curve inversions ended with sharply lower rates, as the 2007 financial crisis, the 2020 pandemic, and the 2022-2024 inflation fight all resolved with significant Bank of Canada easing. All three episodes rewarded borrowers who chose shorter terms and renewed into the decline. Whether the next five years follow the same pattern is exactly the question the break-even math is designed to answer.

What This Means for Canadian Mortgage Rates

Because variable rates are tied to the Bank of Canada’s overnight rate, this yield curve analysis does not change the variable-rate calculus. The Bank is holding at 2.25 percent with risks on both sides, and variable-rate holders face the same uncertainty regardless of which fixed term they might have chosen instead.

Fixed rates follow GoC bond yields, and the five-year to ten-year spread is where the term decision lives. At 35 basis points, the yield curve is telling borrowers that the market premium for an extra five years of certainty is historically narrow. Whether that premium is worth paying depends on whether the 2031 renewal environment will land above or below the 3.95 percent break-even.

In practice, borrowers who plan to hold their property through the full term are paying a historically narrow premium for five extra years of certainty. However, borrowers who may need to sell, refinance, or reposition sooner face prepayment costs that can be substantial on longer fixed terms.

For borrowers with apartment buildings, the stability argument goes beyond the break-even math. In today’s rental market, cash flows are flat or even declining in some segments, with vacancy rates rising and rent growth slowing across several major markets. When revenue is under pressure, locking in a rate for ten years removes one of the largest variables from the operating equation.

If rents have not recovered by 2031 and the renewal rate comes in higher than expected, the borrower faces a squeeze from both sides: weaker income and higher debt service. A ten-year lock eliminates that second risk entirely, giving the borrower one less problem to manage through a difficult cycle.

What Could Change the Picture

If oil prices retreat and the Bank of Canada begins cutting rates later this year, GoC yields would fall and the 2031 renewal environment would likely land well below the 3.95 percent break-even. In that scenario, the five-year strategy wins and history’s 80 percent batting average extends.

The opposite risk is that oil stays elevated and inflation proves sticky. Governor Macklem warned in the April Monetary Policy Report that consecutive rate increases are possible if energy costs spread into broader prices, and in that scenario the 2031 five-year GoC could sit well above 4 percent, making the ten-year lock the cheaper path in hindsight.

Trade policy adds another layer of uncertainty. If the USMCA review beginning July 1 leads to significant new U.S. restrictions on Canadian exports, the Bank would likely cut to support growth, pushing GoC yields lower and tilting the math back toward shorter terms.

Bottom Line

The yield curve has normalized after two years of inversion, and the premium for locking in a ten-year fixed term is narrower than what borrowers have historically paid. According to the break-even math, the five-year strategy only wins if the 2031 renewal environment is significantly better than the 25-year average, and that is a bet on returning to the low-rate world that ended in 2022.

History strongly favours the shorter term, but that history was written during a long decline in rates. For borrowers making term decisions this spring, the question is not whether the ten-year is cheap in absolute terms, but whether the five-year to ten-year spread is narrow enough to make the extra certainty worth considering. At 35 basis points, the yield curve says it is closer than it has been in a long time.

For apartment building owners managing flat or declining cash flows, the case may be simpler still. Fixing a rate for ten years takes one of the biggest cost variables off the table, and at today's spread, the price of that certainty is historically low.

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