With fewer concerns around inflation and the scale of government borrowing, market participants say Canada has been relatively sheltered from the worst of the rout.The Canadian Press/The Canadian Press
A recent global bond sell-off, which has pushed long-term U.S. government borrowing costs to their highest level in many years, hasn’t left Canada unscathed.
As the U.S. 30-year Treasury yield has risen to levels it last touched almost 20 years ago, in June, 2007, its Canadian equivalent has climbed to nearly 18-year highs. That’s to be expected: U.S. and Canadian bonds tend to trade with a high correlation to each other, said Konstantin Boehmer, portfolio manager and head of fixed income at Mackenzie Investments.
Bond yields move inversely to prices.
But behind the headline yield increase, the Canadian bond market has held up better than many of its international peers. With fewer concerns around inflation and the scale of government borrowing, and lower interest rates – despite growing expectations for a possible Bank of Canada hike in the coming months – market participants say Canada has been relatively sheltered from the worst of the rout.
“Canadian bonds look quite well-behaved in the global space,” said Mr. Boehmer, referring particularly to longer-term instruments.
The U.S. 30-year Treasury yield stood at 5.24 per cent on Friday, up 37 basis points – or 0.37 percentage points – since the beginning of the year. Canada’s 30-year government bond yield was at 4.16 per cent, up 24 basis points since the start of January.
In Britain, significant fiscal concerns have pushed long-term borrowing costs to a 28-year high this week. The 30-year Gilt yield stood at 5.77 per cent on Friday, up nearly 50 basis points this year. Japanese 30-year yields have risen even more sharply, up nearly 60 basis points in the same period, to 3.98 per cent on Friday.
“Canada’s done a much better job managing their fiscal side,” said Derek Brown, managing director and head of fixed income at Toronto-based investment manager Beutel, Goodman & Co. Ltd.
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He said that in recent years, the U.S. has averaged federal deficits of around 6 per cent of gross domestic product. In Canada, even under the federal government’s “Canada Strong” budget, the combined federal and provincial deficit is only around 3.5 per cent of GDP, Mr. Brown said.
While governments in the U.S. and Canada were both using stimulus strategies to boost their economies, he said the U.S. approach is more akin to a “sugar rush,” with tax cuts and immediate expensing that allows AI hyperscalers to claim significant tax deductions.
“Canada is focusing much more on infrastructure and ports and pipelines and trains. That’s a much more healthy type of stimulus that takes a long time to burn through.”
If Canadian government bonds have been doing relatively well – or have lost less, relative to their peers – corporate bonds have fared even better.
The S&P Canada Investment Grade Corporate Bond Index has edged up 0.7 per cent since the start of the year, and the Canada High Yield Corporate Bond Index has gained nearly 3.4 per cent.
Mr. Brown said that long-end buyers like insurers and pension plans looking for higher yields have helped to cushion the sell-off at the longer end of the corporate credit curve over the past month.
Corporate credit spreads, the premium that corporate issuers pay over benchmark yields to issue debt, have not been widening as might be expected in an environment of higher oil prices and expectations of higher interest rates, he said.
Corporate debt issuance has remained robust: Hanif Mamdani, Vancouver-based managing director and head of alternative investments at RBC Global Asset Management, and manager of the PH&N High Yield Bond Fund, said in an interview that there has been an “explosion of issuance” from companies that had not previously tapped the high-yield debt market. He estimated issuance of “high-yield-like” corporate debt instruments in the past 18 months at around $30-billion.
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But Canada has not seen the deluge of AI-related bonds that has swamped the U.S. corporate debt market, which has added to upward pressure on yields.
Reuters reported that AI hyperscalers have issued US$220-billion worth of debt in 2026, citing BNP Paribas data as of Aug. 10, compared with US$12.5-billion a year earlier.
Canada’s dominant corporate issuer mix of financials, energy and pensions companies makes for a very different market.
“It’s basically very high quality, very positive free-cash-flow-generating companies,” said Avi Hooper, a St. Catharines, Ont.-based senior adviser to ABP Invest Ltd., a research firm headquartered in London, England.
Few observers expect the run-up in bond yields to extend much further. Mr. Boehmer said that long-end bond yields are “at a pretty good spot,” with U.S. long real yields – the yields investors can expect after accounting for inflation – at 3 per cent.
At the same time, expectations for a reversal are likely misplaced.
“We have exited the post-great-financial-crisis paradigm of ultra-low interest rates,” said Mr. Brown. Investors are “still getting used to” a higher rate environment, he said.
“We’re back to what the norm was. The exception was probably the last 10 to 15 years.”