With the chatter on rising bond yields around the world, we thought it would be interesting to take a look at Canada’s fiscal position. We believe higher yields are unsurprising given our government’s deficit spending, and our viewpoint is detailed as follows:

Prior to COVID, interest rates were on a declining trend. This trend reversed, in part due to multi-decade high inflation that rapidly drove bond yields and the Bank of Canada’s policy rate higher through 2022-2023.

Spending by the Government of Canada, funded by unprecedented levels of debt issuance, likely also contributed to the rise in interest rates.

That said, despite the increase in debt issuance, supply appears to be well-covered, with coverage ratios remaining healthy relative to historical levels.

Absorbing the expansion in issuance are hedge funds, who have become one of the most active participants in new federal debt supply. A 2026 report indicates hedge funds account for >40% of new issuance buying and ~25% of secondary market trading.

Higher bond yields raise the cost of financing positions, which could be a future stressor for the market given the leveraged nature of hedge funds. That said, the current backdrop has seen a fairly orderly rise in rates rather than chaotic changes.

The well-behaved narrative is supported by the auction tails - an indicator of investor demand measured by difference between the highest accepted yield and the average yield of the auction - although the long end has widened slightly.

Record foreign demand for Canadian debt has given auction participants a channel to offload inventory…

… enabling the market to absorb heavier issuance without wider tails. With yields rising globally, let’s see if foreign demand remains durable.