A low coupon and a price beneath Face Value make the Government of Canada 2.25% bond maturing on 1 June 2029 (ISIN CA135087J397) a clear illustration of how older, low-coupon Debt reprices when yields rise. As at 15 September 2026 it traded at 97.06% of face value, an approximate current Yield of 2.32% and a yield to Maturity of 3.397%. It has around 2.7 years left to run and is off-the-run, not a current benchmark. Canada carries ratings of AAA (S&P), Aaa (Moody’s) and AA+ (Fitch).

What is this bond?

This is a conventional nominal federal bond. It pays fixed interest of 2.25% a year on each C$100 of face value, in two semi-annual instalments, and repays the C$100 principal at maturity on 1 June 2029. It has no call feature, so the yield to worst equals the yield to maturity.

With roughly 2.7 years remaining, it is a short-to-medium security. Its low coupon gives it slightly higher duration than a similar-maturity bond with a larger coupon, because a greater share of its value is weighted towards the principal repayment at maturity rather than the small interim payments.

Why is this bond in focus?

This bond was issued when yields were considerably lower, so its 2.25% coupon now looks small against prevailing short-term Government of Canada yields. That mismatch pushes the price well below par, and the resulting discount is the central feature that draws analytical attention.

The security is off-the-run: it is not the current two-year or three-year benchmark, and so trades less actively than the on-the-run issues dealers quote as reference points. Off-the-run bonds can carry yields slightly different from the interpolated benchmark curve, reflecting Liquidity and specific Supply and demand.

What are Canadian bond yields doing?

Bank of Canada benchmark yields as at 11 September 2026 were 3.35% at two years, 3.44% at three years, 3.65% at five years, 3.74% at seven years, 3.95% at ten years and 4.28% at thirty years. The curve is positively sloped, having normalised from its 2023–24 inversion, with the front end anchored near the 2.25% policy rate.

At 2.7 years, this bond sits between the two- and three-year points. Its yield to maturity of 3.397% on 15 September 2026 lies just above the 3.35% two-year benchmark yield from 11 September, consistent with that stretch of the curve. That yield reflects expectations for the average overnight rate over the bond’s remaining life, plus a modest term premium.

Interest rates and the Bank of Canada

The Bank of Canada held its overnight rate target at 2.25% at the 2 September 2026 decision, with the Bank Rate at 2.50% and the deposit rate at 2.20%. This was a hold, following earlier easing from higher levels, and 2.25% is seen as within the neutral range.

Governing Council said it is “prepared to adjust Monetary Policy as needed,” pending its read on the recovery and the Inflation outlook, with no pre-commitment. The next decisions are due on 28 October 2026, with a Monetary Policy Report, and 9 December 2026.

For a bond maturing in mid-2029, most of the remaining life overlaps with the Bank’s policy horizon, so shifts in rate expectations feed directly into the yield and price.

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. Core Inflation was softer, with CPI-trim and CPI-median both at 2.0%, near target, and CPI excluding gasoline around 2.4%.

Gasoline, up 22.8% year on year but decelerating from 25.7%, is the main reason headline runs above core. Travel tours rose 26.1% and rents 2.8%, while grocery inflation cooled to 2.8%. Real GDP grew at a 3.3% annualised pace in the second quarter of 2026, roughly 0.8% quarter on quarter, and Unemployment edged down to 6.4% in August, though the Bank still describes labour Demand as subdued.

Inflation expectations matter for a low-coupon bond: because more of its value rests on the fixed principal due in 2029, sustained inflation surprises can weigh on its real return.

Coupon versus market yield

The 2.25% coupon is fixed for the bond’s life. The market yield moves with conditions. On 15 September 2026 the yield to maturity of 3.397% stood well above the coupon, which is why the price sat below par at 97.06%.

Because the coupon is low relative to prevailing yields, the price must fall until the total expected return matches those yields. A buyer at 97.06 receives the modest coupon plus a Capital Gain as the price pulls up towards C$100 at maturity in June 2029. That pull-to-par effect is what lifts the yield to maturity of 3.397% well above the 2.32% current yield, which counts only coupon against price. The size of the discount reflects the coupon shortfall and the bond’s duration, not a verdict on value. Coupon, current yield and yield to maturity are three distinct measures.

What could move this bond next?

Short-dated yields respond chiefly to Bank of Canada decisions and to inflation and labour data. Softer inflation or a weaker labour market could lower yields and lift the price; firmer inflation could push yields higher. Because of its low coupon and slightly longer duration, the price is a touch more sensitive to yield moves than a higher-coupon bond of the same maturity. The October and December decisions are the near-term signposts.

Key risks to watch

The principal risk is that headline inflation near 3% proves stickier than the core readings imply, keeping the Bank on hold. Tariff-related growth risks are two-sided. Heavy but stable federal supply, with gross bond issuance planned at around C$298 billion for 2026-27, is a background influence across the curve. The low coupon also means most of the return depends on the final principal repayment.

What investors may watch next

Investors may follow the 28 October and 9 December Bank of Canada decisions, the next CPI and Labour Force Survey releases, and how off-the-run short-dated bonds trade relative to the current benchmarks.