Derek Johnson outlines how structurally higher inflation has set a new, or old, returns profiled for Canadian fixed income
Each month at WP, we offer a slate of articles and content pieces that go deep on a particular topic. This month, we're focusing on fixed income.
‘Transitory inflation’ may be a banned term among central bankers and economists now, after the experience of 2022 scarred the investment world. In the wake of the US-Israeli war with Iran, and its subsequent oil shock, the term began to make its way faintly back into the zeitgeist. While elevated oil prices have ebbed and flowed, a broader reality has been reinforced by that war: inflation is likely to stay elevated for longer.
For Derek Johnson, Vice President & Portfolio Manager at Canoe Financial, structurally higher inflation puts Canadian fixed income assets in “a fine place.” The repricing that occurred amid the extreme inflation spikes of 2022 weren’t positive for the asset class, but since then inflation sitting at the high end of central bank target rates leaves interest rates in a place where they pay decent income and gives Canadian investors a high risk-free rate of return.
“Prior to 2022, that great repricing, we lived in a world where risk free rates were very low credit spreads were very high. In that world you want to invest in corporate bonds and, and not in government bonds,” Johnson says. “Fast forward to today we have the exact opposite. We have high risk-free rates and very tight credit spreads. When I think of a risk reward, that leads us to own high-quality corporate bonds. Things that are basically government, like infrastructure and banks. No high yield. You’re getting your risk-free rate plus a little bit of credit spread premium.”
What inflation, sluggish growth mean for the BoC
Despite a more rapid slowdown in inflation than the United States, Canada has been subject to some of the same macro forces that have kept inflation higher. That includes the oil shock from the Iran war, as well as the rapid price increases for certain goods and technical components brought about by the AI infrastructure buildout. Underneath that is the global trend towards reshoring, redundancy, and renewal of domestic manufacturing, all of which is inflationary.
While Canada faces upward pressure on inflation from these forces, there are some pressures on the country’s economic growth. While Canada fell into a technical recession over Q4 of 2025 and Q1 of 2026, Johnson notes that the Bank of Canada (BoC) is maintaining a level of accommodative monetary policy that makes a sustained recession highly unlikely. Moreover, the infrastructure and defense spending programs that have begun under Prime Minister Carney ought to be accretive both to growth and inflation.
There are ongoing risks to GDP growth that Johnson sees. Beyond the trade war with the US, he sees a wider demographic problem caused by Canada’s aging population and exacerbated by recent curbs to immigration. As the baby boomer generation continues to retire, they will create a growing economically unproductive consumer class, effectively a stagflationary cohort in Canada. He argues that without increases to immigration, Canada will head down the road of Japan.
Put together, these factors imply to Johnson that the BoC will hold rates steady on Wednesday during its scheduled interest rate decision. As the primary drivers of inflation in Canada are on the supply side, there’s little that the demand curb of a hike can do to control them.
How should advisors play Canadian fixed income now?
For all the macro forces pulling on central bank decision makers, the Canadian fixed income market has hit a place where a well positioned fund can offer strong total returns. Johnson notes the example of his firm’s own Canadian Bond Advantage Fund since yields peaked in October of 2023, with annualized returns since that date of just over seven per cent. If total returns can be found at a level close to the historical average for equity markets over the long-term, and the relatively lower risks that come with fixed income, then Johnson says an allocation makes a lot of sense right now.
Generating those returns involves allocating beyond government bonds, into the Canadian corporate credit space. Johnson explains that Canoe tends to focus on names in the triple A through high triple B rated credit. Canadian corporate credit, he notes, offers an extremely high quality set of names, with particular benefit coming from allocations to Canadian banks. That allocation, combined with an average duration of about seven years, is designed to perform in a deflationary spiral and offer enough coupon and carry to offset higher inflation. Johnson says, readily, that fixed income allocations like this are “unsexy,” but that is essentially the point. He argues that in this environment, the benefits of solid returns from fixed income should not be overstated.
“We always pitch three fundamental principles of owning a core bond fund. You want income, you want insurance, and you want liquidity… When stocks do go down 30% and you want to reallocate, you want something liquid to sell and that’s your bond portfolio,” Johnson says. “Advisors need to remind themselves and clients that there’s a reason why you own lower yielding or lower risk reward, lower volume assets. It’s not for the return expectations. It’s for the safety, the insurance, the liquidity and the income.”
