1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 142
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
flashing warning signs. The U.S. economy could be slowing into Q1 2026 which would likely keep a
bid on Treasury bonds.
U.S. CPI versus U.S. unemployment rate
6%
4%
2%
2022
2023
US CPI YoY
2024
2025
US Unemployment Rate
Sources: Bloomberg Finance L.P., Scotia Wealth Management
The risks for rates are tilted to the downside for the first half of 2026 as markets may begin to price
a longer-than-expected easing cycle along with a possible expansion of the RMP in response to a
further deterioration of labour conditions that are likely not fully evident as the shutdown-delayed
data starts rolling in. We anticipate the U.S. employment picture to deteriorate further and
accommodative monetary policy to likely put downward pressure on the front end of the curve
which could later propagate along the term structure. Our macroeconomic forecast model calls for
lower rates in the U.S. over the next 12 months.
One concern for the U.S. Treasury market is the additional borrowing/supply to finance the deficit.
U.S. Treasury supply will likely remain unchanged from 2025 levels as the Treasury doesn’t see a
need to increase auction sizes until early 2027. The current fiscal year schedule, ending September
2026, would raise approximately $1.54 trillion and the current administration is set to limit a large
increase in average coupons. The Treasury department will likely lean on issuing more T-bills in
2026, pushing the bill share of marketable debt slightly higher to 22.1% for fiscal 2026 vs 21.5% for
fiscal 2025.
In credit, investment grade gross new issuance in 2026 is estimated to be about $1.55 trillion,
roughly in line with 2025 volumes. All-in funding costs declined in 2025 with the November average
coupon at 4.95% versus 5.30% at the start of the year largely due to lower nominal rates whereas
spreads, while volatile around April tariff headlines, ended the year largely unchanged. Relatively
attractive financing rates, particularly in the front to mid-term part of the curve, may push the
supply slightly above estimates, especially if AI-related spending keeps that sector active (see next
section: Investment Grade Corporate Debt). The high yield maturity calendar is relatively light for
2026 at just $81 billion, down sharply from year-ago levels due to active refinancing for much of
2025. The broad refinancing risk has now shifted to 2028, though elevated early call activity may
reduce that burden should current yields hold.
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