The Government of Canada 2.25% bond maturing on 1 December 2029 is one of the medium-term issues that investors tend to revisit when they map out the middle of the yield curve. Carrying the ISIN CA135087N670, it has a residual life of roughly 3.2 years as at 15 September 2026. Its low coupon relative to today’s prevailing yields has left it trading at a discount, quoted at about 96.145% of Face Value on that date, with a yield to Maturity of 3.529%. Those figures place it firmly in the three-to-four-year part of the market rather than the front end.

What is this bond?

This is a conventional fixed-rate bond issued by the Government of Canada. It pays a fixed coupon of 2.25% a year, in two semi-annual instalments, calculated on the bond’s face (par) value of 100. When the bond matures on 1 December 2029, a holder receives that face value back, regardless of the price at which the bond changed hands beforehand.

Canada’s federal Debt carries very high Credit ratings: S&P rates it AAA, Moody’s Aaa and Fitch AA+. In practical terms, the market treats timely payment of the coupons and principal as extremely likely, so the bond’s price moves are driven mainly by interest rates rather than by concerns about repayment.

Why is this bond in focus?

The attention this issue attracts stems from the gap between its coupon and current market yields. Its 2.25% coupon was set when yields were lower. With comparable Government of Canada yields now higher, the bond’s price has fallen below par so that a buyer’s total return lines up with prevailing rates. That is why it trades at roughly 96.145% of face value as at 15 September 2026.

It is worth stressing that this bond is off-the-run. It is not one of the Bank of Canada’s designated benchmark bonds, so it should not be described as the current three-year or five-year benchmark. It is simply an existing issue that sits between benchmark maturities.

What are Canadian bond yields doing?

Government of Canada yields were positively sloped as at 11 September 2026. The Bank of Canada’s benchmark readings showed the 2-year at 3.35%, the 3-year at 3.44%, the 5-year at 3.65%, the 7-year at 3.74%, the 10-year at 3.95% and the 30-year at 4.28%. The curve, which had been inverted in 2023-24, has normalised, with the front end anchored near the policy rate and longer maturities above 4%.

This bond’s yield to maturity of 3.529% (15 September 2026) sits close to the interpolated three-to-five-year part of that curve, consistent with its roughly 3.2-year residual life.

Interest rates and the Bank of Canada

The Bank of Canada held its overnight rate target at 2.25% at its decision on 2 September 2026, with the Bank Rate at 2.50% and the deposit rate at 2.20%. That level is regarded as within the Bank’s estimated neutral range. Governing Council said it was prepared to adjust policy as needed and would weigh the durability of the economic rebound against the Inflation outlook, offering no pre-commitment.

The next scheduled decisions fall on 28 October 2026, alongside a Monetary Policy Report, and on 9 December 2026. Because this bond has a few years to run, its price is sensitive to how the rate path evolves over that horizon rather than to any single meeting.

Inflation and the economic backdrop

Statistics Canada reported headline CPI at 3.0% year on year for August 2026, released on 14 September 2026 and unchanged from the prior reading. The Bank’s preferred core measures were closer to target, with CPI-trim and CPI-median both at 2.0%. CPI excluding gasoline ran at around 2.4%. Elevated energy prices, with gasoline up 22.8% year on year, were the main reason headline inflation sat above core.

Growth data showed real GDP expanding at a 3.3% annualised pace in the second quarter of 2026, a rebound from a weak start to the year, while the Unemployment rate edged down to 6.4% in August. The Bank still described labour Demand as subdued.

Coupon versus market yield

The distinction between the bond’s figures matters. The coupon rate is fixed at 2.25% of face value. The current yield, roughly 2.34% as at 15 September 2026, simply divides the annual coupon by the discounted price. The yield to maturity of 3.529% is higher still because it also captures the pull to par: the gradual rise of the price from about 96.145 towards 100 as maturity approaches.

That pull-to-par effect explains why the yield to maturity exceeds the coupon. A holder who buys below face value and holds to maturity earns both the coupons and the difference between purchase price and the face value repaid. None of this makes the bond a bargain; the discount is the market’s way of aligning a low-coupon bond with higher prevailing yields.

What could move this bond next?

Several forces could shift the price. Fresh signals on the Bank of Canada’s rate path, particularly around the October and December decisions, would feed directly into three-to-four-year yields. Inflation surprises in either direction would matter, as would the strength of the growth rebound. Federal debt Supply is another factor: the Department of Finance planned gross bond issuance of about $298 billion for 2026-27, heavy but stable.

Key risks to watch

The principal risk is duration risk. If medium-term yields rise, the price of this bond would fall, and vice versa. Reinvestment risk, the uncertainty around rates when coupons are reinvested, is secondary for a bond of this length. Inflation risk also bears watching, since persistent price pressures could keep yields elevated and weigh on the bond’s market value.

What investors may watch next

Investors are likely to track the 28 October and 9 December Bank of Canada decisions, the next CPI releases, and updates to the federal fiscal outlook. Movements in the three-to-five-year segment of the Government of Canada curve will be the clearest guide to how this bond’s price and yield to maturity evolve.