Monthly commentary - Mackenzie Fixed Income Team

Fixed Income Market Update

Recent minutes from the October FOMC meeting underscore a cautious stance amid limited visibility, echoing the ‘driving in fog’ analogy. The committee appears increasingly divided, with distinct camps favoring either rate cuts or holding steady. Labor market data adds complexity: September payrolls rose by 119,000, but downward revisions and an uptick in unemployment to 4.44% point to softening conditions. With incomplete October and November data due to reporting delays, policy decisions will rely on partial information, reinforcing the likelihood of a hawkish cut now and a pause in 2026 as the cycle stabilizes.

Proposals to distribute direct payments funded by tariff revenues highlight a growing fiscal theme. While full implementation appears unlikely, even partial measures could widen the deficit and trigger market sensitivity at the long end of the curve. Such developments risk repricing across fixed income and spillovers into credit and equities, underscoring how fiscal credibility has become a key determinant of global risk sentiment.

Japan’s push for aggressive infrastructure spending and tax cuts has accelerated upward pressure on JGB yields and fueled speculation of currency intervention as USD/JPY trades near multi-year highs. This reinforces a broader trend: markets are increasingly penalizing perceived fiscal excess, a dynamic evident since the UK gilt episode in 2022. Similar risks loom across developed markets, making fiscal credibility a central macro driver.

Domestic inflation in Canada eased to 2.2% on headline measures, with core metrics also softer, though shelter costs remain firm. Despite recent strong employment prints, underlying trends suggest fragility. October gains were concentrated in part-time roles, likely linked to temporary factors. Policy rates are expected to hold near term, but structural headwinds such as housing affordability, immigration slowdown, and trade uncertainty, support the case for cuts in the first half of 2026, in our view. Current market pricing underestimates this risk, leaving short-end Canadian rates positioned for adjustment.

Fund Positioning

In North America, the focus shifts to short-end Canadian rates, where market pricing underestimates the likelihood of policy easing. Current expectations imply minimal downside risk for the Bank of Canada, yet structural headwinds—housing stress, immigration slowdown, and trade uncertainty suggest cuts by mid-2026. This disconnect creates an opportunity to position via receiver swaps or short-duration instruments, capturing potential repricing opportunities as the curve adjusts lower.

The strategy is deliberately neutral on U.S. duration, reflecting uncertainty around Fed timing and the risk of fiscal-driven yield volatility at the long end. Spread compression trades (e.g., long U.S. vs short Canada) that dominated earlier in the year have largely been unwound, shifting emphasis toward selective curve plays rather than outright directional bets.

The dominant strategy revolves around exploiting carry opportunities in emerging markets, where real yields remain exceptionally attractive. Countries such as Brazil, Mexico, South Africa, and Peru feature policy rates far above inflation, creating a meaningful real yield differential. This environment allows investors to earn substantial income while maintaining exposure to relatively stable macro conditions. The approach often combines local rate positions with FX exposure for enhanced return potential. These trades have contributed meaningfully to portfolio performance across global and unconstrained mandates. If U.S. rates and the dollar remain broadly stable, the global backdrop supports carry-rich environments, making these positions resilient unless a significant risk-off shock materializes.

A broader thematic overlay is critical, in that the fiscal credibility has become a global macro driver, influencing bond markets in developed economies as much as emerging ones. This informs a cautious stance on long-end exposure in regions where fiscal overspend perceptions could trigger sharp repricing, as seen in Japan and previously in the UK.

Central Bank Watch

Credit Market Performance

High-yield bond spreads were volatile in November as markets navigated shifting expectations for the December Fed meeting, the longest U.S. government shutdown in history, a strong earnings season, and a dip followed by recovery in equities. Single-B rated bonds led performance with a +0.80% monthly gain, ahead of BBs at +0.67%, while CCCs declined -0.40%. From a sector perspective, Autos (+1.51%) and Media (+1.20%) outperformed, whereas Technology lagged at -0.21%, compared to the overall HY index return of +0.57%. Decompression trends that began in October persisted, with CCC credits posting a second consecutive monthly loss. Inflows returned by month-end, and capital market activity strengthened, with issuance rising to $24.9 billion in November, up from October. Meanwhile, the third-quarter HY earnings season was robust, though sector-level dispersion remained elevated.

The loan market in November displayed a clear bifurcation. High-quality, performing loans remained well bid, while lower-quality credits faced persistent weakness, pulling down the overall average loan price for the month. From a ratings perspective, higher-rated loans, particularly BBB and BB outperformed, as did benchmark loans. Technicals remained robust, supported by strong CLO formation despite ongoing retail outflows. This trend has favored issuers for much of the past three years. Defaults remain contained. The Chapter 11 trailing 12-month default rate declined to 1.25% by principal amount and 1.26% by borrower count, excluding liability management exercises (LMEs), which now represent two-thirds of defaults. The combined default rate (Chapter 11 + LMEs) fell to 3.7% from 4.2% in October. Recoveries, however, remain at record lows, driven by structural shifts such as cov-lite documentation, prevalence of LMEs, and the rise of asset-light sectors.

Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns as of November 30, 2025, including changes in share value and reinvestment of all distributions and does not take into account sales, redemption, distribution, or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in the investment products that seek to track an index.

Index performance does not include the impact of fees, commissions, and expenses that would be payable by investors in investment products that seek to track an index.

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