A Market Price well below par is the first thing that stands out about the Government of Canada 1.5% bond maturing on 1 June 2031. As at 15 September 2026 it traded at 90.815% of face value, meaning a holder pays roughly C$908 for every C$1,000 that will be repaid at maturity. That steep discount is not a signal of trouble at the AAA-rated federal government. It is the arithmetic of a low 1.5% coupon set against today’s higher medium-term yields, and it lifts the bond’s Yield to Maturity to 3.641%, far above the coupon.

What is this bond?

This is a nominal Government of Canada bond, ISIN CA135087M276, carrying a fixed annual coupon of 1.5% paid in two semi-annual instalments. It repays its Face Value in full on 1 June 2031, leaving about 4.7 years to run as at 15 September 2026. As a direct federal obligation it holds Canada’s sovereign ratings of AAA from S&P, Aaa from Moody’s and AA+ from Fitch.

The bond was issued when prevailing interest rates were far lower than they are now, which is why its coupon is only 1.5%. Its low coupon, rather than any Credit concern, is the reason it trades at a substantial discount today.

Why is this bond in focus?

The bond draws interest chiefly because of that discount. At 90.815% of face value as at 15 September 2026, it sits roughly 9 percentage points below par, one of the more visible discounts in the five-year part of the curve. That gap invites the question of why a top-rated government bond should trade so far below 100, and the answer lies entirely in the mismatch between its coupon and current yields.

It is an off-the-run security. It is not the current five-year benchmark, a role held by a newer issue. Off-the-run bonds typically trade a little less actively than the on-the-run benchmark, though Government of Canada issues remain broadly liquid.

What are Canadian bond yields doing?

Government of Canada benchmark yields, published by the Bank of Canada as at 11 September 2026, sloped upward across maturities. The two-year stood at 3.35%, the three-year at 3.44%, the five-year at 3.65%, the seven-year at 3.74%, the 10-year at 3.95% and the 30-year at 4.28%.

The curve has normalised from its inverted shape of 2023 and 2024. With about 4.7 years to maturity, this bond sits near the five-year point, and its 3.641% yield to maturity as at 15 September 2026 lands just below the 3.65% five-year benchmark reading.

Interest rates and the Bank of Canada

The Bank of Canada held its overnight rate target at 2.25% at the decision on 2 September 2026, with the Bank Rate at 2.50% and the deposit rate at 2.20%. It was a hold, not a cut, and 2.25% is viewed as within the Bank’s estimated neutral range following earlier reductions.

Governing Council said it stood “prepared to adjust Monetary Policy as needed” and would weigh the durability of the economic rebound against the Inflation outlook, making no pre-commitment. The next scheduled decisions are on 28 October 2026, with a Monetary Policy Report, and 9 December 2026. For a bond maturing in 2031, the multi-year expected path of the policy rate carries more weight than any single meeting.

Inflation and the economic backdrop

Statistics Canada put headline consumer price inflation at 3.0% year on year for August 2026, released on 14 September 2026 and unchanged from the prior month. Core measures were softer: CPI-trim and CPI-median both stood at 2.0%, near the target midpoint, while CPI excluding gasoline ran near 2.4%.

Gasoline, up 22.8% year on year but decelerating, remained the main reason headline inflation exceeded core. Real GDP grew at a 3.3% annualised rate in the second quarter of 2026, rebounding from a soft start to the year, and Unemployment edged down to 6.4% in August, though the Bank still called labour Demand subdued.

Coupon versus market yield

The distance between the 1.5% coupon and the 3.641% yield to maturity is the crux of this bond’s story. The coupon was fixed at issue to match a lower-rate era. With comparable five-year yields near 3.65% as at 11 September 2026, a 1.5% coupon falls well short, so the market price drops below par until the bond’s total return matches prevailing yields.

That is why the discount is so deep. A holder pays 90.815% today but receives 100% at maturity, and this pull-to-par gain, added to the modest coupon, drives the yield to maturity to 3.641%. By contrast, the current yield of about 1.65%, which measures only the coupon against the price, understates the total return because it ignores the Capital Gain to par.

What could move this bond next?

Lower inflation readings or evidence of a softening labour market could rekindle expectations of policy easing, tending to push medium-term yields down and prices up. Sticky headline inflation or firmer growth could lift yields and weigh on prices. Heavy but stable federal issuance, with gross bond Supply planned near C$298 billion in fiscal 2026-27, supports term premium across the curve.

Key risks to watch

Interest rate risk is the primary concern: with a long duration for its coupon size, this bond’s price is sensitive to yield moves, and a holder selling before June 2031 could receive less than they paid. Inflation risk erodes the real value of the low fixed coupon if prices stay elevated. Liquidity is generally deep, though off-the-run bonds can trade less actively than benchmarks.

What investors may watch next

The 28 October and 9 December 2026 Bank of Canada decisions, upcoming CPI prints and fresh growth and labour data are the natural focal points. The five-year benchmark yield will remain the closest reference for how this deeply discounted bond is priced.