Report highlights emerging risks and the sweet spots offering potential
Fixed income strategies defined by geopolitical tension and trade uncertainty means advisors need to keep on top of guidance as to where the risks and opportunities are emerging.
With the US tariff deadline fast approaching – and Treasury Secretary Scott Bessent using CNN over the weekend to warn trading partners to agree a deal or “on August 1 you will boomerang back to your April 2 tariff level” – risk remains elevated heading into the third quarter.
The July FTSE Russell Fixed Income Insight Report notes that tariffs have had measurable consequences for Canada’s labour market, with unemployment rising to 7%, its highest since 2021. Weekly earnings have softened and forward growth projections for 2026 were revised down to 0.9%.
However, a pause in monetary tightening and the rescinding of a planned digital services tax – to which Trump responded by ceasing trade negotiations - point to potential improvement in cross-border trade relations by late July.
For fixed income positioning, duration and credit quality are proving critical. Despite volatility, Canadian corporate credit delivered stable 1–2% returns in Q2, with BBB-rated bonds modestly outperforming higher-rated peers.
Sector-wise, Real Estate and Financials continue to lead performance, aided by declining credit spreads and the fall in corporate bond durations - down to 5.1 years for IG corporates - with the shorter duration positioning the asset class well in a market still weighing inflation risks.
High yield credit is rebounding strongly, dominated by Energy, which is benefiting from oil price recoveries, while spreads briefly widened in June before returning to post-COVID lows.Canadian HY yields remain attractive at 5–6%, with Communications yielding 6.8%, a potential sweet spot for yield-seeking investors who can shrug off the volatility.
For sovereign bonds, the Canadian yield curve steepened through Q2. Long-dated government bonds underperformed, with inflation break-evens nearing US levels, raising concerns about long-end vulnerability. However, the curve now presents a more “normal” profile than a year ago, offering renewed laddering opportunities.
Globally, G7 central banks largely held rates steady in June, with the ECB the only exception. Currency effects were substantial - euro and sterling strength, combined with a weaker US dollar - helped European bonds top the performance charts in Canadian dollar terms. For Canadian clients with global mandates, currency-hedged Euro IG and HY bonds emerged as Q2 leaders, according to the report.
