Canada Market Update: Bond Yields Fall as Toronto Office Rebounds
By Daniel Lester – Analyst & Evan Dermott – Intern
Recent Declines in 5-Year GoC Bond Yields
The 5-year Government of Canada (GoC) bond yield has experienced a notable downward trend over the past week, currently stabilizing within the 2.70% to 2.76% range. This represents a significant contraction from the 2.95% threshold observed earlier this month.
Key Drivers of Yield Contraction
- Easing Inflation: January CPI slowed to 2.3%, underperforming forecasts and reducing the “inflation premium” required by investors.
- Trade Volatility: Uncertainty regarding CUSMA reviews and potential U.S. tariffs has prompted a “flight to safety,” driving bond prices up and yields down.
- U.S. Correlation: Canadian yields followed a downward trend in U.S. Treasuries triggered by softer American inflation data.
Source: Morningstar
Toronto Office Market: Resurgence in the Financial Core
Toronto’s office market saw a significant recovery in Q4 2025, with the availability rate dropping 210 basis points year-over-year to 16.7%. This was fueled by “flight-to-quality,” as downtown Class A availability fell to 13.7% following nearly 8.6 million square feet of leasing activity. With the 2.1 million-square-foot construction pipeline already 81.8% pre-leased, the market is shifting toward a “reposition-existing” model, forcing tenants to modernize older assets to meet the high demand for premium, collaborative workspaces.
The $134.6 million acquisition of 70 York Street by Desjardins Global Asset Management underscored this institutional confidence. Formerly the HSBC Building, the asset’s occupancy surged from 20% to 92.5% by the time of sale. By resolving a land lease to secure 100% freehold ownership, the buyers capitalized on the resurgence of the financial core, marking the highest-value office transaction of 2025 and validating the stabilization of premium downtown assets.
Outlook: The RTO Catalyst and 2026 Supply Constraints
The outlook for 2026 is defined by a supply squeeze as the Ontario provincial government transitions to a full five-day in-office workweek in January. This mandate, alongside similar requirements from major financial institutions, has accelerated absorption in the downtown core. With a multi-year low in new supply, the market narrative has shifted from vacancy concerns to a competitive scramble for premium contiguous space, positioning 2026 as a year of sustained rent growth for high-tier properties.
