Monthly commentary - Mackenzie Fixed Income Team

Fixed Income market update

September was a challenging month for fixed income, with bond yields moving higher in Canada, the United States and other major markets. The fixed income team identified several overlapping drivers in the form of resilient US growth, substantial corporate issuance, renewed pressure on energy prices and a reassessment of central-bank policy. Artificial intelligence-related capital spending continued to support US economic activity, while the associated financing requirements added to bond supply, particularly at longer maturities.

Renewed Middle East hostilities added to pressure across the energy complex. Higher oil, diesel and natural gas prices were feeding into transportation and other costs, reinforcing concerns that inflation could remain elevated. In the team’s assessment, these pressures, together with heavy issuance, left longer-term bonds vulnerable even with further monetary tightening. US Treasury buyback operations had not prevented yields from moving higher, underscoring the continued influence of these underlying market drivers.

The Federal Reserve raised its policy rate by 25 basis points, its first increase in approximately three years. Its updated projections pointed to further tightening before year-end and no rate cuts in 2027, a change from June’s expectation of easing next year. Immediately following the announcement, shorter-term yields rose while longer-term yields declined, flattening the yield curve. The team viewed this initial response as consistent with greater confidence in the Fed’s commitment to addressing inflation, rather than a resolution of the broader pressures facing bonds.

In Canada, the Bank of Canada held its policy rate at 2.25%, as expected. The team noted a shift in the Bank’s communication towards upside inflation risks and away from its earlier emphasis on tariff-related growth weakness. The Bank highlighted the second-quarter growth rebound, but the team questioned whether that momentum would persist given population and immigration trends. Although the domestic policy outlook remained important, Canadian bond yields continued to take direction from developments in the larger US market.

Looking ahead, the approaching US midterm elections introduced another policy risk around AI investment incentives. We do not expect those incentives to be unwound but view a reversal as potentially significant for capital spending, valuations and bond markets. This remained a risk to monitor rather than the central expectation, given the importance of AI investment to the team’s assessment of US economic strength.

Fund positioning

The macro team was broadly neutral on Canadian and US duration coming into the FOMC versus overweight at the start of the month. The previous Canadian duration overweight had been sold, while the interest-rate exposure of the US Treasury Inflation-Protected Securities position had been offset with short Treasury futures. The remaining inflation-protection trade was being unwound. The team seeks more confirmation before adding duration again, noting the limited additional yield available from longer maturities relative to shorter bonds and the risks associated with elevated volatility.

In emerging markets, currency exposure on the Mexican and Brazilian bond holdings had been hedged, while the underlying bonds were retained. The Brazilian hedge was introduced ahead of the election. The team had also been adding currency-hedged Mexican government bonds, citing the additional yield available after hedging. The call also noted a recent addition of Australian rates exposure. Credit allocations were largely unchanged with participation in new issues, alongside sales of shorter-dated bonds, modestly increased spread-risk exposure. Team continues to favour Canadian-dollar hybrids and looking to add higher-quality credit and higher-quality high-yield exposure in an environment in which earning carry remained important, with limited movement in spreads.

The credit and high yield bond funds increased term-loan allocations, which positively contributed to relative performance in September. Their underweight in CCC-rated bonds also helped limit exposure to some of the month’s largest decliners.

On monetary policy, we expect one or two further Fed rate increases. We also see scope for Bank of Canada hikes, potentially beginning in December, while cautioning that underlying Canadian growth was weaker than the Bank’s assessment and that tightening could prove to be a policy error.

Credit market performance

September brought a sharp divergence between US fixed-rate high-yield bonds and floating-rate leveraged loans. Escalating Middle East tensions and a more hawkish Federal Reserve pushed Treasury yields higher, while heavy issuance and fund outflows added pressure on high-yield bonds. Technology and healthcare bonds held up better than the broader market, while telecommunications and cable lagged. Leveraged loans were more resilient, supported by coupon income, positive investor flows and a recovery in software-related credits. The Fed’s rate increase also improved the outlook for future floating-rate interest income. However, loan prices retreated late in the month as stronger business activity and inflation concerns weighed on sentiment.

Credit quality remained a dividing line: single-B credits outperformed in both markets, while CCC-rated borrowers continued to struggle. Lower-rated loan issuers faced more limited refinancing options and rising debt-service costs. Primary markets nevertheless remained active, with acquisition and buyout financing rebounding and large transactions contributing to a busy issuance calendar. High-yield net issuance reached a record despite the weaker secondary market. Meanwhile, default and distressed-exchange activity moderated during the third quarter. J.P. Morgan reported two payment defaults and no distressed exchanges in September, although payment-default volume for the year remained above the comparable period in 2025.

Source: Bloomberg as of 30^th September 2026, performance is reflective of local returns

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