On the Radar: Will Slumping Canadian and U.S. Consumer Confidence Lead to Lower Rates?

Capital Markets update
Jan 30, 2026

First National Financial LP

Key Takeaways

Slumping confidence can pull 5-year and 10-year government yields lower when it credibly signals weaker growth and a higher probability of central bank easing, especially in the 5-year terms, where policy expectations dominate.
The confidence to yield link can invert when inflation risk is the primary driver, yields can rise even as sentiment deteriorates because markets demand inflation compensation and price a tighter policy path.
The base-case setup today points to mild downward pressure on 5-year yields in both countries, with 10-year yields needing confirmation from hard data on jobs, spending, and inflation before they move materially lower.

Confidence is weakening in both countries, but the mechanics differ

U.S. consumer confidence has fallen to its lowest level in roughly 12 years. The Conference Board’s Consumer Confidence Index dropped to 84.5 in January, and the Expectations Index fell to 65.1, well below the 80 level the Conference Board associates with recession risk. The message embedded in the survey is not simply “people feel bad”; it is that households are increasingly cautious about the labor market, income prospects, and near-term business conditions, which tend to translate into slower spending and hiring.

Canada’s consumer sentiment is also under pressure, but the reason is more balance-sheet driven. The Bank of Canada’s Canadian Survey of Consumer Expectations reports that the overall indicator declined slightly in Q4 2025 and remains subdued, with a modest deterioration in financial health and household spending intentions contributing to the decline. The survey also highlights a higher perceived likelihood of missing debt payments, a practical marker of household stress and a signal that the consumer may become more defensive about discretionary spending.

There is also an important cross-sectional detail that shapes what confidence means for growth. The Bank of Canada survey cycle notes that the deterioration is driven primarily by the financial health index, and that spending intentions edged lower, while also pointing to greater resilience in real spending expectations among households with equity holdings. That split matters because it can delay the aggregate slowdown. If asset-owning households keep spending, the headline confidence drop can look dramatic while total consumption decelerates only gradually, which tends to limit how far longer-term yields fall in the early phase of the adjustment.

How confidence reaches the yield curve?

Bond yields are priced off expectations for growth, inflation, and central bank policy, plus a term premium that compensates investors for duration risk. Confidence matters only when it shifts those expectations in a durable way.

The 5-year yield is typically the cleanest expression of a changing policy path. If confidence weakness feeds into weaker retail demand, softer hiring, and slower wage growth, markets tend to bring forward expected easing, and the 5-year yield usually responds first and most reliably.

The 10-year yield requires more than softer sentiment. It is sensitive to the expected medium-term real growth path, but it also embeds longer-run inflation expectations and term premium. In a world where inflation is not collapsing and uncertainty is elevated, 10-year yields can remain sticky even as confidence erodes, particularly if investors demand extra compensation for inflation uncertainty or fiscal supply dynamics.

This is the practical reason professional markets often treat confidence as a leading indicator, not a direct trigger. The signal is meaningful when it shows up in the sequence that follows: spending plans soften, job growth slows, then inflation pressure fades, and policy expectations shift.

The last 25 years show two regimes, plus one accelerator

The historical relationship between confidence and 5-year and 10-year yields is best understood as two recurring regimes, with crisis episodes acting as an accelerator.

In growth-led downturns, confidence weakens, demand slows, inflationary pressures ease, and markets reprice the policy path lower. Yields fall, often materially, across 5s and 10s. The early-2000s cycle is a clean example. In early 2000, the U.S. 10-year yield was above 6%, and by mid-2003 it had fallen to roughly 3% as the macro mix shifted toward weaker growth and easier policy. The 5-year moved even more decisively because it tracked the repricing of the Fed’s multi-year policy trajectory. The pattern was not about a single confidence print; it was about confidence confirming an economic downshift that was already underway.

In inflation-led stress, the relationship can reverse. Confidence can fall as households are frustrated by prices, but yields rise as the market expects tighter policy and demands higher inflation compensation. The 2022 episode illustrates the point: yields rose sharply during periods when inflation risk dominated, even as household sentiment measures were weak. This is the regime where confidence is a symptom of inflation, not a predictor of disinflation, and bonds do not rally the way they typically do in growth scares.

Then there are crisis accelerators, when confidence collapses alongside a genuine shock, risk appetite breaks, and investors rush into government bonds. The 2020 pandemic shock is the clearest modern case, with 5-year and 10-year yields falling rapidly in a matter of weeks as markets priced an abrupt collapse in activity and aggressive central bank easing. In these episodes, the safe-haven bid can overwhelm most other factors in the short run, compressing yields quickly and broadly.

What to expect from here?

The current setup looks more like a growth-and-uncertainty slowdown than an inflation-acceleration shock. In the U.S., the Expectations Index is deeply pessimistic by the Conference Board’s own recession-warning framing, which raises the probability that spending and hiring soften further. In Canada, the Bank of Canada’s survey evidence points to household stress and weaker spending intentions, which is exactly the kind of micro-level signal that can precede a macro deceleration.

If that macro deceleration shows up in the hard data, the most likely yield response is a larger move in 5-year yields than in 10-year yields. The 5-year maturity tends to embed the expected policy path over the next several years, and it usually reacts first when markets begin to price rate cuts or a prolonged pause. The 10-year will follow more decisively when the market becomes confident that inflation is trending back toward target and that the easing cycle, or at least the risk of easing, is real.

The main risk to the “lower yields” thesis is an inflation-dominant reprise. If inflation expectations rise again, or if new supply-side pressures keep price growth sticky, markets can remain reluctant to push longer yields materially lower. In that scenario, confidence can stay weak without producing a meaningful bond rally, and the curve can stay elevated in 10s even if 5s grind down.

What mortgage holders should watch?

The practical test of whether confidence will pull yields down is whether it migrates from surveys into behavior and then into data.

First is labor market confirmation. A confidence slide that coincides with softer job growth, rising unemployment, or weaker hiring intentions is far more likely to pull 5-year yields lower and eventually drag 10-year yields down.
Second is consumption follow-through. Watch retail sales, services demand, and large-ticket purchase categories. Confidence is often a leading indicator, but yields move most when the spending slowdown becomes visible.
Third is inflation direction. A clean disinflation trend creates room for a rally in 10-year yields. Sticky inflation limits that rally even when growth slows.
Finally, watch the equity-holder split in Canada and the U.S. If equity markets remain firm and asset-owning households keep spending, the slowdown can be delayed, and the bond market reaction can be more gradual than the headline confidence narrative implies.

Slumping consumer confidence increases the odds of lower rates, but the bond market response depends on which regime dominates. In growth-led slowdowns, yields typically fall as markets reprice policy and inflation expectations lower. In inflation-led stress, yields can rise even while confidence deteriorates. The professional takeaway is that confidence is most actionable for rates when it is corroborated by softening spending, weakening labor data, and a cooling inflation trend. In today’s Canada-U.S. setup, the balance of evidence points to incremental downward pressure in the 5-year sector first, with 10-year yields needing clearer confirmation from the macro data before they move meaningfully lower.

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