Government of Canada bonds maturing around a decade from now have drawn fresh attention this autumn, and the 3.25% December 2035 issue (CA135087T537) sits squarely in that part of the curve. With roughly 9.2 years of residual life as at 15 September 2026, the bond changes hands at 95.57% of face value, a discount to par. Its Yield to Maturity stands at 3.826%, above its 3.25% coupon and close to the Bank of Canada’s 10-year benchmark yield of 3.95% recorded on 11 September 2026. The gap between coupon and yield is the story here.

What is this bond?

This is a conventional nominal bond issued by the Government of Canada, formally listed as Canada Treasury Bonds 3.25% 01-DEC-2035. It pays a fixed 3.25% coupon on its face value, typically in two semi-annual instalments, and repays the principal in full at maturity on 1 December 2035.

Canada carries top-tier sovereign ratings: S&P AAA, Moody’s Aaa and Fitch AA+. That grading reflects the federal government’s taxing capacity and its debt-servicing record.

The coupon is fixed for the life of the bond. What moves is the market price, and therefore the yield an investor buying today would earn if they held to maturity. At 95.57% of face as at 15 September 2026, the bond trades below par, which lifts the yield above the coupon.

Why is this bond in focus?

Attention has gathered because medium-dated yields have stayed elevated relative to the fixed coupons on bonds issued in lower-rate years. The 3.25% December 2035 bond was struck with a coupon that now sits below prevailing market yields for similar maturities, so its price has drifted below par.

That makes it a useful illustration of how the coupon, the Market Price and the yield to maturity interact. Investors watching the 10-year area of the curve, where the Bank of Canada’s benchmark yield was 3.95% on 11 September 2026, see this bond’s 3.826% yield to maturity as roughly consistent with its slightly shorter residual life of about 9.2 years.

One point of precision: this is an off-the-run bond. It is not the current 10-year benchmark; that role belongs to a different issue. Off-the-run bonds can trade with marginally different Liquidity from the on-the-run benchmark, though both are direct obligations of the same issuer.

What are Canadian bond yields doing?

The Government of Canada Yield Curve was positively sloped as at 11 September 2026. The 2-year benchmark yielded 3.35%, the 5-year 3.65%, the 7-year 3.74%, the 10-year 3.95% and the 30-year 4.28%. The front end sits close to the 2.25% policy rate, while the long end trades near or above 4%.

This upward slope marks a normalisation from the inverted curve of 2023 and 2024, when short rates exceeded long ones. A positive slope typically reflects a policy rate markets judge near neutral, plus a term premium for holding longer-dated debt.

For the December 2035 bond, the 10-year area is the relevant reference. Its 3.826% yield to maturity as at 15 September 2026 sits a little below the 3.95% 10-year benchmark, consistent with its maturity falling just inside 10 years.

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%. This was a hold, not a cut. The 2.25% level is regarded as within the Bank’s estimated neutral range.

Governing Council said it is “prepared to adjust Monetary Policy as needed” and would assess the sustainability of the economic rebound and the Inflation outlook, without pre-committing to a path. The next scheduled decisions fall on 28 October 2026, alongside a Monetary Policy Report, and 9 December 2026.

Policy rates most directly anchor the short end of the curve. A bond maturing in late 2035 is influenced more by expectations for average rates and inflation over the coming decade, and by the term premium, than by the current overnight rate alone.

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 softer: CPI-trim and CPI-median both sat at 2.0%, close to the 2% target. CPI excluding gasoline ran near 2.4%.

Elevated gasoline prices, up 22.8% year on year though decelerating from 25.7%, are the main reason headline inflation sits above core. Rents rose 2.8% and travel tours jumped 26.1%, while grocery inflation cooled to 2.8%.

On growth, real GDP expanded 3.3% annualised in the second quarter of 2026, a rebound from a weak start to the year, with solid consumption. Unemployment was 6.4% in August 2026, edging down, though the Bank still describes labour Demand as subdued.

Coupon versus market yield

The distinction matters. The 3.25% coupon is fixed and paid on face value. The current yield of roughly 3.4% as at 15 September 2026 divides the annual coupon by the discounted market price. The yield to maturity of 3.826% also captures the gain as the price pulls toward par by December 2035.

Because the bond trades at 95.57% of face, a holder to maturity would receive 100 at redemption, adding to the return alongside coupons. This “pull to par” is why the yield to maturity exceeds the current yield, which in turn exceeds the coupon. It reflects arithmetic between price and par, not income beyond the contractual cash flows.

What could move this bond next?

Shifts in the 10-year benchmark yield, driven by inflation data and Bank of Canada communication, would feed through most directly. A move away from 3.95% would reprice comparable maturities.

Federal Supply is also relevant. The Department of Finance planned gross bond issuance of about $298 billion for 2026-27, down from roughly $317 billion the prior year but still heavy. Steady long-end issuance supports the term premium.

Key risks to watch

Interest rate risk is central: at roughly 9.2 years, this bond carries meaningful duration, so its price is sensitive to yield moves. Rising yields would weigh on the price; falling yields would lift it.

Inflation risk matters too. Should headline inflation prove stickier than the core measures suggest, markets could demand higher long yields. Liquidity is another consideration, since off-the-run bonds may trade less actively than the benchmark.

What investors may watch next

The immediate calendar points to the Bank of Canada decisions on 28 October and 9 December 2026, the next CPI releases, and any revisions to the federal issuance plan. Movements in the 10-year benchmark yield, last at 3.95% on 11 September 2026, will remain the clearest guide to how this bond’s price behaves.