Trading almost exactly at face value, the Government of Canada 3.5% bond maturing on 1 September 2029 (ISIN CA135087R895) offers a useful example of a bond whose coupon closely matches prevailing yields. As at 15 September 2026 it was priced at 99.95% of face value, an approximate current Yield of 3.5% and a yield to Maturity of 3.519%. It has around three years left to run and is off-the-run, not a current benchmark. Canada is rated 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 3.5% a year on each C$100 of face value, in two semi-annual instalments, and returns the C$100 principal at maturity on 1 September 2029. It has no call feature, so the yield to worst equals the yield to maturity.

With roughly three years of residual life, it sits in the medium-short part of the curve. Because it trades near par, its coupon and current yield are close together, and its price sensitivity to yield changes is typical for its maturity.

Why is this bond in focus?

This bond stands out precisely because it is unremarkable in one respect: at 99.95% of face value, it trades essentially at par. That makes it a clean reference for the three-year part of the Government of Canada curve, where coupon, current yield and yield to maturity nearly coincide. When a bond sits near par, its coupon is close to the market yield, so there is little premium to amortise or discount to accrete.

The bond is off-the-run, meaning it is not the current three-year benchmark despite its maturity being near that tenor. Off-the-run issues trade less actively than the on-the-run reference bonds and can carry yields slightly different from the interpolated benchmark curve.

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 about three years, this bond aligns with the three-year point on the curve. Its yield to maturity of 3.519% on 15 September 2026 sits a little above the 3.44% three-year benchmark yield from 11 September, a small gap consistent with its off-the-run status. That yield reflects the average overnight rate investors expect over the next three years 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 viewed as within the neutral range.

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

With three years to maturity, the bond’s value is shaped by how markets expect the overnight rate to evolve over that horizon, making the coming decisions relevant to its yield.

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 measures were 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 eased to 2.8%. Real GDP grew at a 3.3% annualised rate in the second quarter of 2026, about 0.8% quarter on quarter, and Unemployment edged down to 6.4% in August, though the Bank still describes labour Demand as subdued.

The balance between firm headline inflation and a soft labour market is the key influence on where three-year yields, and therefore this bond, are priced.

Coupon versus market yield

The 3.5% coupon is fixed. The market yield moves with conditions. On 15 September 2026 the yield to maturity of 3.519% sat just above the coupon, which is why the price stood fractionally below par at 99.95%.

When a coupon is close to prevailing yields, the price hovers near C$100 and there is only a small discount to accrete towards par by maturity. A buyer at 99.95 receives the coupon plus a very small Capital Gain as the price pulls to par in September 2029. This is why the yield to maturity of 3.519% is only marginally above the 3.5% current yield. Coupon, current yield and yield to maturity are distinct measures, and here they nearly align because the bond trades so close to face value.

What could move this bond next?

Three-year yields respond 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. As an off-the-run issue, demand relative to the current benchmark can also nudge its yield. The October and December decisions are the near-term signposts.

Key risks to watch

The chief risk is that headline inflation near 3% proves stickier than the core measures imply, keeping the Bank on hold longer than markets expect. Tariff-related growth risks are two-sided. Heavy but stable federal supply, with planned gross bond issuance of around C$298 billion for 2026-27, is a background influence across the curve. Trading near par, the bond has little premium or discount to work off, so its return is driven mainly by the coupon and by yield moves.

What investors may watch next

Investors may follow the 28 October and 9 December Bank of Canada decisions, upcoming CPI and Labour Force Survey releases, and how this off-the-run bond trades relative to the current three-year benchmark.