The Government of Canada, and all major nations, finance their activities and accumulated deficits, by issuing "bonds". In the US they are known as "Treasuries" and in the UK "Gilts". The duration and interest rate paid on new issues of these bonds depends upon the financial strategy of the Government in power. The accumulated outstanding amounts of these bond issues, past and present, is know as "the National Debt". New issues are constantly required either to refinance maturing issues or finance current Government deficits, and a bond (say in $100,000 denominations) is considered a "commodity" by the market. Like every other commodity, its price can go up or down. 

A new bond issue may set a "coupon" rate of interest at current market, say $100 million at 5.8% for an issue of 5-year duration. If this issue is made coincident with an economic or political event which drives down its value (say an unexpected "Yes" vote in a Quebec referendum), the effect on interest rates is immediate. The individual $100,000 denomination bond may fall in value to $95,000, thus yielding a significantly higher return for the buyer at the lower price. The combined "yield" of interest and capital gains sets the new base market rate for wholesale funds. Any financial institution seeking funds from these same investors, for example to correct an imbalance in deposit and loan commitments, will have to pay this yield plus a small "premium over Canada's" to secure them.

 Investors who buy and sell these Government securities in large quantities, such as multinational corporations, pension funds and the like, weigh many factors, including the currency value and economic prospects of Canadian and other competing nations' issues. They then determine what price they'll pay for Government of Canada Bonds. The price they'll pay immediately defines the base market rate for wholesale funds. Every day, trends in this rate are watched closely by all Financial Institutions, in order to be in a position to adjust their rates on deposits and loans if required. 

All Canadian mortgage lenders are acutely aware that their current or potential retail depositors can choose to put their money into none of the financial institutions GIC's in a rising rate market, and instead buy other "fixed income securities" such as bonds, which yield a higher rate because they adjust immediately to market changes. They can even switch their funds into the stock market if this is performing relatively better. 

Therefore, in the truest sense of the word, the mortgage lending institutions are competing with other markets for the investor's money. If a bank doesn't attract enough depositors to fund all the mortgages, they'll have to go where their depositors go - the money market - to make up the difference....and there, they pay the going rate!