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The Canadian economy is in relatively good shape compared to a number of developed countries around the world, but the knock-on effects of rising global bond yields will still cause pain.

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“The upward pressure on global yields will put pressure on our borrowing costs, regardless of what we do,” said Kyle Hanniman, an associate professor at Queen’s University in Kingston, Ont., who researches public debt.

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Ten-year gilt yields in the United Kingdom rose to nearly 5.3 per cent earlier this week, reaching their highest level since the 2008 financial crisis before pulling back, while 10-year government bond yields in Japan crossed three per cent for the first time in three decades. The 10-year United States Treasury yield rose to nearly 4.8 per cent on Tuesday to touch its highest level since late 2023 before falling.

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Government of Canada bond yields rose, too, but in a more muted fashion, touching a two-year high Wednesday before pulling back.

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Hanniman said the reigniting of tensions in Iran, which put pressure on central banks to raise rates to try to contain the impact of rising energy costs, was one of the reasons behind this week’s volatile bond activity.

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“But the biggest pressures likely stem from the growing supply of sovereign bonds and the inflationary pressures associated with fiscal deficits,” he said. “Canada looks pretty good in all this, despite the recent trade tensions. Its general government deficit, while worrying, isn’t all that high in relative terms.”

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U.S. government debt, which has been putting pressure on Treasury yields amid concerns over long-term fiscal sustainability, pushed past US$40 trillion on Aug. 18.

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Hanniman said other factors affecting the bond markets include a massive increase in corporate bond issuance, particularly among the companies behind the artificial intelligence boom, and continued concerns around the credibility of the Donald Trump administration’s policies.

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Despite challenges to Canada’s economy, including an escalating trade war with the U.S. and some internal referendum activity, the country has managed to avoid the one-time spikes in deficits and public struggles over fiscal consolidation that have occurred in countries including the U.K., Japan, France, and the U.S., he said.

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Those issues have made bond markets in those countries more sensitive to subsequent fiscal and policy developments. However, Hanniman said Canada’s fiscal situation is also very challenging, with no signs of relenting.

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Marc-Andre Pigeon, an assistant professor at the University of Saskatchewan’s Johnson Shoyama Graduate School of Public Policy in Saskatoon, said the long-run trend in bond markets is toward rising yields despite some pullback from the highs earlier this week.