Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 58
RHYTHMIC REASONING | TEMPO, TIMING AND TUNING
F I X E D I N CO M E
Catherine Payne
Managing Director, Fixed Income
George Kolev
Gilberto Cabral Haro
Senior Manager, Global
Sovereigns
Senior Manager, Investment
Grade
2 Yr. Yield
10 Yr. Yield
3m. ∆
2-10Yr
YTD ∆
2-10Yr
Canada Gov't
2.47%
3.18%
3 bps
41 bps
U.S. Treasury
3.61%
4.15%
4 bps
22 bps
Global Sovereign
2.80%
3.42%
6 bps
19 bps
3m. ∆
spread
YTD ∆
spread
Corporate
YTM
Spread (bps)
'AAA' IG Corp.
4.41%
34
'AA' IG Corp.
4.01%
45
-7 bps
+9 bps
'A' IG Corp.
4.20%
65
-10 bps
-11 bps
'BBB' IG Corp.
4.47%
93
-15 bps
-13 bps
'BB-B' HY Corp.
5.71%
210
-17 bps
-15 bps
'CCC+/D' HY Corp.
10.55%
675
-60 bps
+24 bps
-4 bps
-6 bps
Source: Bloomberg Finance LP, Scotia Wealth Management
IG=Investment Grade, HY=High Yield
KEY CONCLUSIONS
•
•
•
Weaker economy keeps front and mid part of Canadian yield
curve supported by accommodative Bank of Canada
US curve steepener continues with the Federal Reserve
expected to cut interest rate over next few quarters
Emerging market local debt well positioned to continue
strong performance
Fig. 1: Global Central Banks to remain accommodative
in 2026 (market implied pricing to June’26)
Monetary Policy Rates (%)
6%
4%
2%
0%
FOMC
BoC
Current
ECB
BoE
BoJ
Expected Policy rate in 2Q26
Source: Bloomberg Finance LP, Scotia Wealth Management
RBA
BANK OF CANADA BALANCING RISKS OF A WEAKER ECONOMY
AND JOB GROWTH AMID EVOLVING INFLATION SCENARIOS
After holding its monetary policy rate at 2.75% through much
of the summer as it evaluated how tariffs would impact the
Canadian economy, the Bank of Canada (BoC) reduced its
overnight rate in September by 25 bps to 2.50%. As expected,
Canada’s GDP declined in Q2 by about 1.6% on a quarter-overquarter annualized basis with tariffs and trade uncertainty
weighing on the economy. Exports fell sharply in Q2, reversing
much of the earlier gains as companies rushed to get orders
ahead of tariffs and business investment also declined.
Consumption and housing activity both grew at a healthy pace,
though slowing population growth and the weakness in the
labour market in the months ahead may weigh on household
spending.
With GDP growth considerably weaker than expected, the labour
market continues to be the main concern for the BoC as job growth
came to an abrupt halt in July and August and pushed the labour
market to negative cumulative job growth for the first time since
January. The Bank of Canada looks set to continue easing its policy
rate into 2026 with market implied pricing (at report date) implying
one more rate cut on the horizon.
The key question remains though if this truly is a shift in in focus
from inflationary concerns to the employment picture. The BoC
acknowledges that core inflation continues to run around 2.50%,
above its inflation control target of 2% (within its 1-3% range) but
the softening employment market and hiring intentions suggests
companies are hesitant and uncertain about the future despite
some clarity on the tariff front. The removal of some retaliatory
tariffs on imported goods from the U.S. will mean less upward
pressure on prices but it’s too early to declare victory over inflation
just yet. The Bank of Canada likely has one more cut in its forecast
and then monetary policy will be reasonably well calibrated.
Another complicating factor is the absence of clarity regarding the
Federal government’s fiscal picture, and the budget will finally be
released on November 4. This will present a lot of new information
for the BoC to process as to how the budget impacts the overall
economy over the remainder of 2025 and first half of 2026.
Canadian credit markets have outperformed their federal and
provincial counterparts, which is not surprising given the central
bank’s monetary easing to stimulate the economy while higher
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