1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 140
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
lingering tariff impacts. There is the potential for a nearer term bond rally given the uncertainty
from delayed U.S. macroeconomic data for the inflation and employment picture but over the
medium term, yields will likely rise as government bond issuance is set to increase to finance rising
deficits with defense and infrastructure spending on the horizon.
In credit, 2025 was a year of record gross new issuance (approximately C$162 billion according to
Scotiabank Global Banking & Markets) that was met with healthy demand. We anticipate steady
issuance and demand to continue into the first half of 2026 as companies potentially pull forward
refinancing upcoming maturities ahead of potential rate hikes. In the next section, we discuss the
AI funding dynamic in the U.S. corporate market, which has not transpired in Canada to the same
degree. If the AI funding materially ramps up, this could put pressure on U.S. credit spreads and
reverberate into the Canadian market. Absent that and despite rich valuations, we anticipate
investment grade credit continuing to outperform in the first half of 2026. We continue to favour
higher quality companies.
Canadian fixed income markets are now pricing that the Bank of Canada is on hold until Q4’26 and
its next move will be to increase its monetary policy rate. Scotiabank’s Economics team also
forecasts that the BoC will increase rates as early as Q3’26 and while timing of the hikes can be
debated, it appears that the Canadian economy has weathered the tariff storm quite well. There
are a lot of developments over the coming months that could influence the path of future rates, so
the jury is still out on whether the Bank of Canada is indeed finished cutting rates.
For portfolio positioning, the front end of the curve offers value with the rate hike scenario in the
second half of 2026 more than fully priced in and the curve steepening trade set to continue,
though more moderately, through the first part of 2026. While the curve steepened over 55 bps (2
year - 10 year) in 2025 and the trade is likely in the later stages as the BoC cut its overnight rate
from 3.25% to 2.25% in the year, the upward movement of the whole curve is possible should
economic growth re-accelerate; as such, we believe that staying shorter in duration (preferring the
short- to mid-term part of the curve) is the best place to weather potentially higher rates.
Additionally, floating rate notes will be on our screens to evaluate over the coming months.
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