As the 10-year area of the Government of Canada curve edges toward 4%, the 3.25% March 2036 bond (CA135087U360) offers a clear window into how fixed coupons and shifting market yields diverge. With around 9.5 years of residual life as at 15 September 2026, the bond trades at 94.61% of face value, a discount to par. Its Yield to Maturity of 3.937% sits well 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 discount is doing the work.

What is this bond?

Formally the Government of Canada 3.25% 01-MAR-2036, this is a conventional nominal bond and a direct obligation of the federal government. It pays a fixed 3.25% coupon on face value, usually in two semi-annual instalments, and returns principal in full at maturity on 1 March 2036.

Canada holds the highest sovereign grades from two of the three major agencies: S&P AAA, Moody’s Aaa and Fitch AA+. Those ratings reflect the federal government’s fiscal capacity and its debt-servicing record.

The coupon does not change over the life of the bond. The Market Price does, and with it the yield an investor would earn buying at today’s levels. At 94.61% of face as at 15 September 2026, this bond trades below par, so its yield sits above its coupon.

Why is this bond in focus?

The bond stands out because its coupon was fixed in a lower-yield environment than the one prevailing today. As comparable 10-year yields have climbed toward 4%, the 3.25% coupon has looked modest against the market, and the price has adjusted downward to compensate buyers.

That adjustment is the essence of bond arithmetic. To deliver a competitive yield when the coupon is fixed, the price must fall. At 94.61% of face, the March 2036 bond offers a yield to maturity of 3.937%, broadly in line with where the 10-year part of the curve trades.

A point of precision: this is an off-the-run bond, not the current 10-year benchmark. That designation belongs to a separate June 2036 issue. Off-the-run securities remain full obligations of the same issuer but may trade with slightly different Liquidity from the on-the-run benchmark.

What are Canadian bond yields doing?

Government of Canada yields formed a positively sloped curve as at 11 September 2026. Benchmark yields ran from 3.35% at 2 years, through 3.65% at 5 years, 3.74% at 7 years and 3.95% at 10 years, to 4.28% at 30 years. The front end sits near the 2.25% policy rate, while the 10-year sits close to 4%.

This upward slope represents a normalisation from the inversion of 2023 and 2024, when short yields exceeded long ones. A positive slope typically signals a policy rate near neutral plus a term premium on longer maturities.

For the March 2036 bond, with roughly 9.5 years to run, the 10-year benchmark is the natural reference. Its 3.937% yield to maturity as at 15 September 2026 sits just below the 3.95% benchmark, consistent with its residual life.

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. The Bank regards 2.25% as within its estimated neutral range, having eased from higher levels earlier in the cycle.

Governing Council said it stands “prepared to adjust Monetary Policy as needed,” assessing the durability of the rebound and the Inflation outlook without pre-committing. The next decisions are scheduled for 28 October 2026, with a Monetary Policy Report, and 9 December 2026.

The policy rate anchors the short end most directly. A bond maturing in 2036 reflects markets’ expectations for average rates and inflation across the next decade, plus the term premium, more than the current overnight setting alone.

Inflation and the economic backdrop

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

Gasoline, up 22.8% year on year though slowing from 25.7%, is the principal reason headline sits above core. Rents rose 2.8% and travel tours climbed 26.1%, while grocery inflation eased to 2.8%.

Real GDP grew 3.3% annualised in the second quarter of 2026, a rebound from a soft start to the year, led by consumption. Unemployment was 6.4% in August 2026, edging lower, though the Bank continues to describe labour Demand as subdued.

Coupon versus market yield

Three figures need to be kept apart. The 3.25% coupon is fixed and paid on face value. The current yield of roughly 3.44% as at 15 September 2026 relates the coupon to the discounted market price. The yield to maturity of 3.937% adds the effect of the price rising toward par by March 2036.

Because the bond trades at 94.61% of face, a holder to maturity would receive 100 at redemption, above today’s price. That pull to par lifts the yield to maturity above both the current yield and the coupon. It is arithmetic, not additional income beyond the bond’s contractual cash flows.

What could move this bond next?

The clearest driver is the 10-year benchmark yield. Should inflation data or Bank of Canada guidance push that yield above or below 3.95%, comparable maturities including this one would reprice.

Supply also matters. 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 substantial. The federal Deficit is projected near $50 billion, or about 1.4% of GDP. Steady issuance at longer maturities supports the term premium.

Key risks to watch

Interest rate risk is prominent. At about 9.5 years, the bond carries significant duration, so its price is sensitive to yield moves in either direction.

Inflation risk is a second concern: if headline pressures persist beyond what core measures imply, markets may demand higher long yields, weighing on prices. Liquidity is a further factor, as off-the-run bonds can trade less actively than the benchmark.

What investors may watch next

Attention centres on the Bank of Canada decisions on 28 October and 9 December 2026, subsequent CPI releases and any change to the federal issuance plan. The 10-year benchmark yield, at 3.95% on 11 September 2026, remains the most direct gauge of how this bond’s price may evolve.