Pressing risks to the economy could force the Bank of Canada to continue its rate-cutting cycle, says Adam Ditkofsky, senior portfolio manager, global fixed income at CIBC Asset Management.

“The bank being on hold has been prudent,” he said in an Aug. 5 interview. “But while inflation remains their primary focus for the bank, we can’t ignore that the bank just recently cut their growth outlook for Canada significantly, from an average growth rate of 1.8% to 1.3% this year, and to 1.1% next year.”

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Ditkofsky said there are three key risks to growth.

1. The unemployment rate

Currently at 6.9% and expected to rise, the unemployment rate is causing wage growth to drop, he said, adding that there are 3.3 unemployed people for every job available, and fewer than 500,000 jobs available across Canada.

“Without more labour needs, I expect our unemployment rate is going to worsen,” Ditkofsky said.

2. Trade uncertainty

If Canada can’t improve relations with the U.S. or find other trade partners for exports, Ditkofsky said he expects a contracted economy.

“We’ll continue to see merchandise trade deficit north of $5 billion a month, which is roughly 2.5% of our GDP on an annualized basis,” he said. “So that would be a massive drag for GDP as well.”

3. A stagnant real estate market

Residential markets, in particular, have rising inventories and sales that are not improving, he said.

“Also, we still have 60% of mortgages coming up for renewal this year, and while it’s not as painful as last year, given that rates have come down, we are still seeing [refinances] going from close to 2% from where they were five years ago for mortgages, to now closer to 4%.”

While Ditkofsky’s base case doesn’t call for a recession, concerns are valid.

“The risks are still very much there,” he said.

Given the expectation of continued rate-cuts — likely two more through Q2 2026 due to trade uncertainty and the risk of re-accelerating inflation — Ditkofsky is long duration for fixed income.

He continues to favour government bonds over corporate credit, which tend to have more expensive valuations.

“Unlike corporate bonds, they offer far more liquidity and are easily tradable,” he said. “In risk-off periods, government of Canada bonds generate positive returns as yields fall, so they should continue to act as a low-risk source of income, and increase overall portfolio diversification.”

Ditkofsky also likes investment-grade credit over high yield. “That doesn’t mean we aren’t buying any high yield. It just means we’re being more constructive on credit investments.”

One overlooked opportunity in fixed income is hybrid securities, he said, which offer higher yields and spreads compared to the traditional bond market, and are even more attractive than high yield today.

“These are generally deeply subordinated capital instruments from investment-grade corporate bond issuers, that are expected to be called by the issuers at certain dates in the future,” he said.

Enbridge, Bell Canada, Rogers, TC Energy and AltaGas are all examples of hybrid securities currently in Ditkofsky’s portfolio.

He said private debt, data center real estate and collateralized loan obligations are less traditional sectors that could also offer opportunities.

“Key fundamentals, relative valuation and bottom-up analysis are very important to me at this juncture,” he said.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Adam Ditkofsky, senior portfolio manager, global fixed income at CIBC Asset Management 

* * * 

In terms of our positioning in our portfolios, with regards to the expectations for the Bank of Canada, we are currently long duration, meaning that we anticipate rates will continue to move lower, as we expect the bank will need to resume its rate-cutting cycle in the coming months. 

Now, if we look at what’s priced into the bond market right now, in terms of expectations for rate cuts, there are no further rate cuts fully priced in for the balance of 2025. But these expectations can quickly change, especially if we continue to see economic weakness that forces the bank’s hand. Right now, the Bank of Canada remains concerned with uncertainty surrounding the U.S. trade war and tariff implications, and more specifically, the bank is concerned with re-accelerating inflation. 

Now, as of the end of June, Canadian CPI stood at 1.9%. But core inflation data points, which exclude the most volatile components, like food and energy, is at approximately 3%. So the bank being on hold has been prudent. But while inflation remains their primary focus for the bank, we can’t ignore that the bank just recently cut their growth outlook for Canada significantly, from an average growth rate of 1.8% to 1.3% this year, and to 1.1% next year. So they may need to provide further support in a stumbling economy. And the current 2.75 for the overnight rate may not be appropriate. 

Now, I break it down into three things. 

The first being unemployment, which now sits at 6.9% and has been rising for the past few years. Anecdotally, it also appears to be getting worse, especially with the tariff uncertainties. Right now, there are roughly 3.3 unemployed people in Canada for every available job in our country. And based on recent StatsCan data, there’s less than 500,000 jobs available in Canada right now. So it’s no surprise we’re seeing wage growth rate quickly drop, and of course, without more labour needs, I expect our unemployment rate is going to worsen. 

The second issue is with the trade war. We’ve drastically reduced our trade surplus with the U.S. to the point that is no longer offsetting the trade deficit we have with the rest of the world. Now, if we can’t quickly improve these relationships or find some substitute markets for our exports, we’ll continue to see merchandise trade deficit north of $5 billion a month, which is roughly 2.5% of our GDP on an annualized basis. So that would be a massive drag for GDP as well. 

Historically, we’ve always thought of ourselves as an export nation because of our raw materials, but unfortunately, that hasn’t been really the case since the Great Financial Crisis. And up until this year, our surplus with the U.S. has offset the deficit with the rest of the world. So trade is painful, and this means that we’ll likely see a contracted economy, at least in the near term. 

And the third being real estate, which in Canada still represents close to 40% of the average household net worth. It has, unfortunately, been stagnant, especially residential markets, with inventories rising and sales not drastically improving. Also, we still have 60% of mortgages coming up for renewal this year, and while it’s not as painful as last year given that rates have come down, we are still seeing refis going from close to 2% from where they were five years ago for mortgages, to now closer to 4%. 

Overall, all three of these aspects — the unemployment rate, the trade situation and the stagnant real estate market — all provide me with confidence to believe that Canada is still very much not out of the woods economically. While the new government will look to stimulate growth, they have also noted plans to cut spending in government jobs. To me, this is all supportive for further monetary stimulus. 

Now, to be clear, our base case is not calling for a recession. But the risks are still very much there, and we continue to expect more rate cuts. And, in terms of our forecast, we’re expecting two to be included, at least until the end of Q2 of next year. 

* * * 

In terms of how fixed-income markets are reacting to the global rate divergence, particularly with the Fed, well, in reality, the Fed and the Bank’s actions have been very similar this year, other than the fact that the Fed has been on pause for longer and their overnight rate is much higher than ours at 4.5%. We’d argue if the U.S. weakens more than anticipated, they have more room to cut rates, especially with rates being well above neutral, and inflation being around 2.5% to 3% in the U.S. 

In July, the Fed left rates unchanged, but we saw that this was not a unified Fed, and President Trump continues to publicly challenge Chairman Powell, threatening to replace him next year. So far, the U.S. economy has been very resilient, but we are starting to see cracks with slowing employment growth, and a modestly weakening consumer. 

So if inflation continues to remain stable, it’s likely we’ll see some cuts this year in the U.S. as well. And if not, Trump could look to replace Powell next year with someone willing to lower rates more aggressively. Currently, in early August, the futures market is pricing in two cuts by the Fed this year, and four cuts by June 2026. We’d argue this is consistent with our forecast where we see four cuts through the second quarter of next year. 

* * * 

In terms of the role of Canadian government bonds in today’s environment compared to corporate credit, well, that role really has never changed. They continue to be a large part of the Canadian bond universe. They represent triple-A securities, or the highest credit quality of government bonds in our country, and they provide reasonable yields for high-quality, low-response securities. 

Unlike corporate bonds, they offer far more liquidity and are easily tradable, and represent benchmark securities that corporate bonds are priced off of. Even in periods of high volatility, like the early days of Covid and the Great Financial Crisis, government bonds maintained their liquidity, while corporate bonds in some cases, couldn’t be moved as easily. 

In terms of needs in a portfolio, government bonds have always acted as a lower-risk diversifier in periods of market sell off, and that should continue to be the base case. In risk-off periods, government of Canada bonds should generate positive returns as yields fall, so they should continue to act as a low-risk source of income, and increase overall portfolio diversification. 

We continue to hold a significant portion of our holdings in government bonds. 

First, markets are not experiencing the inflationary rates of 8% like we did post-Covid. So we aren’t in a period where we see rates rising drastically. And corporate bonds, like stocks, currently have very expensive valuations, with corporate bond spreads being close to their multi-decade tights, which has caused us to become more defensive in our portfolios. 

* * * 

Right now, we favour investment-grade credit over high yield, especially with high-yield spreads being less than 300 basis points, and their overall yields being less than 7% in many situations. Keep in mind, high yield means lower-rated companies, meaning they are considered to have lower credit quality, and in many cases, have weaker credit fundamentals or are more cyclical. Now, as I mentioned earlier, we’re more defensive in our portfolios, so we’re at the lower weights in terms of our positioning. That doesn’t mean we aren’t buying any high yield, it just means we’re being more constructive on credit investments. 

Bottom-up analysis is key to understanding the risks when we make these investments, and I’m also looking for mispriced securities right now. So key fundamentals, relative valuation and bottom-up analysis are very important to me at this juncture. 

* * * 

In terms of overlooked opportunities in fixed income, we still think that there’s some decent opportunities. If you look in our portfolios, one area that we like in particular is hybrid securities, which have essentially replaced the preferred share markets. These are generally deeply subordinated capital instruments from investment-grade corporate bond issuers, that are expected to be called by the issuers at certain dates in the future, but they can be extended. They tend to offer very attractive yields and spreads higher than levels seen in the traditional bond market, and in today’s market, better than the high-yield market. 

These securities benefit the issuers as they are treated as partial equity by the rating agencies, meaning the credit metrics benefit from their issuance while the companies aren’t diluting their equity. And the advantage to bondholders in our portfolios [is] we get enhanced returns that are currently very attractive relative to the rest of the market on a valuation basis. 

And these aren’t new names to us. These are very well-known names in our portfolios. Think about names like Enbridge, Bell Canada, Rogers, TC Energy, AltaGas. These are just some examples, but all high-quality, investment-grade corporate bond issuers where we’ve traditionally held in our portfolios as well. 

Other opportunities that we see that are also still in less traditional sectors, they include some private debt, data centre real estate opportunities that we like as well, and CLOs. And of course, our investment-grade bond funds continue to be solid alternative to cash holdings, offering attractive after-tax yields, with limited risks to yields rising, as all the funds have fixed maturity dates, meaning investors are protected from rising yields if they hold the funds until maturity.

* * *

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

There is a heightened probability of a U.S. recession, primarily due to labour market weakness and inflation risks, says Jeffrey Mayberry, fixed-income asset allocation strategist and portfolio manager at DoubleLine Capital in California.

“The jobless claims number is continuing to go up every single week — not to levels that you’re worried about yet, but the trend is something where we’re probably at a yellow light,” he said in a July 14 interview.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Mayberry said there’s also a risk of higher inflation. “It’s kind of being priced into bonds, but maybe not to the same extent that we are expecting,” he said.

In the current economic environment, Mayberry said he likes inflation swaps, which don’t have the supply/demand dynamics of Treasury inflation-protected securities. Zero coupon inflation swaps are pricing in higher inflation over the next two years. “But over the medium to longer term, inflation is coming back down towards a more normal level.”

However, it’s not all doom and gloom in the U.S., he said. Corporate credit earnings are “very strong,” with low probability of defaults over the medium term, despite ongoing volatility around tariffs.

“(While) there are some worrying signs, nothing where we are advocating for selling credit,” he said. “(It is) something just to keep an eye on, something to have your hand close to the ‘ready’ button, and ready to make potential moves, depending on whether the data worsens or strengthens from here.”

Through year-end, fixed-income investors should consider structured credit, like residential mortgages, commercial mortgages, asset-backed securities, Mayberry said.

“While those spreads have come in and tightened, we think the probability of default is relatively low, and those spreads still give you some advantages over your investment-grade corporate bonds or higher up the credit stack in your high yield, your double-B high yield. You get some more yield, similar amounts of risk, similar amounts of volatility.”

He added that riskier credit continues to do well, with high yield up 2.5% in Q2, almost doubling the return of the Bloomberg U.S. Aggregate Bond Index.

There is also opportunity in non-dollar names, like emerging markets, he said. “Look at Canadian fixed income being a potential buying opportunity to move into those types of non-dollar trades, whether it’s in Canada or anywhere else around the world.”

Mayberry said the Fed is likely to cut rates in September and October, so investors should have more exposure to the lower end of the Treasury curve, and less on the longer end. This includes shorter-duration assets.

“The volatility that we saw in the second quarter could continue here over the rest of the year, and provide some opportunities to pick up some relatively cheap bonds, and try to take advantage of some dislocations in the markets to provide good yielding, good spreading assets with (much) lower amounts of risk,” he said.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Jeffrey Mayberry, fixed-income asset allocation strategist and portfolio manager at DoubleLine Capital 

* * * 

The first half of the year had a pretty good return for fixed income, or at least on the U.S. side. We had about a 4% return on the U.S. Agg [Bloomberg U.S. Aggregate Bond Index] in the first half of the year, and a 1.2% return in the second quarter. It was interesting on the U.S. Treasury curve in the second quarter, you had a pretty good steepening of the Treasury curve, with the two-year down actually 16 basis points, while the 10-year was actually up two basis points, and the long bond was up 20 basis points. 

So, this kind of weird steepening pivot around that 10-year point of the curve is something we’d been expecting, something that we were putting on in our portfolios. But it’s really much more of a move towards the idea that over the long term — and the long-term Treasury’s reflecting this — there are some fiscal problems in the U.S., and that’s really putting upward pressure on longer-term interest rates. 

You have seen, interestingly enough though, credit continuing to do well. Credit spreads have continued to grind in. Certainly, there was a lot of volatility around tariffs and what’s going on in Congress in the U.S. But overall, point to point, spread’s grinding in tighter. Really, if you look at your riskier credits, your high yield was up 2.5% on the quarter. It’s almost doubling the return of the Agg and, your bank floating rate side was up 2.8%. 

Really, the question going forward is, what’s going to happen with inflation, and what’s kind of priced in with inflation? I like to look at inflation swaps. They don’t have the supply/demand dynamics that you do see in Treasury inflation-protected securities. The TIPS really gives you a pure view on inflation. 

And over the shorter term — call it one to two years — zero coupon inflation swaps are pricing in higher inflation, but over the medium to longer term, inflation is coming back down towards a more normal level. If we look at it, we say, yes, that makes sense to us. The tariffs, no matter what level they’re implemented in, will lead to short-term higher inflation, whether it’s year-over-year or maybe a couple years, but shouldn’t affect things over the medium term. 

But really, when we look at it, we think the risk is to higher inflation. The Fed continuing to say inflation is a level that is unacceptable. And so that’s really the risk: that higher inflation. 

No rate cuts at the end of July seems pretty reasonable. But really — and this has been the case throughout the entire year — the probability of rate cuts is continuing to drop. We’re about 65% chance of a rate cut in September. And the first rate cut is continuing to be pushed out. It wouldn’t surprise me if we get, after the July meeting, the September rate probability goes down. And then October rates continuing to come down. And really, you’re at a place where inflation is still at top of mind, given what’s happened over the past five years. And that mindset has to switch in people in order for them to be comfortable with inflation. So I think the risk is to higher inflation. And it’s kind of being priced into bonds, but maybe not to the same extent that we are expecting. 

* * * 

There’s two things to think about here in terms of where we are, in terms of the economy and the credit cycle. Are we going into a recession? There’s kind of two trains of thought here. One is that if you look at the corporate credits, our corporate credit team tells me that earnings are very strong. There’s really a very low probability of defaults over the medium term. And even with the volatility around tariffs — whether the tariffs are going to be implemented or not — the corporations are very strong. 

Now, if you take a step back from the corporate credit side of things, and you look at the labour market, the labour market in the U.S. is starting to maybe show some signs of weakness. The jobless claims number is continuing to go up every single week, not to levels that you’re worried about yet, but the trend is something where we’re probably at a yellow light. “Let’s kind of keep an eye on them and see whether they continue to get worse or not.” But not at a “OK, we’re getting a recession!” level. 

The payroll data continues to be relatively strong, and so you really haven’t seen too many signs of that hard data mirroring the soft data, the sentiment data, that has been looking not terrible, but not great either. There are some signs of maybe a recession on the horizon. We don’t think it’s coming this year as we’re past the first half of the year already. We’re running out of time for there really to be a recession in 2025. But if you kind of say, what’s the probability of recession over the next 12 months, I would say we’re in a little bit higher than average, probably 60% probability of recession in the next 12 months, where it seems like the markets are pricing in a 40% chance of recession. So, we’re kind of inversed flip-flop on what markets are pricing in. 

There are some worrying signs, nothing where we are advocating for selling credit, especially since that corporate credit is continuing to remain strong and earnings are going to remain strong. But something just to keep an eye on, something to have your hand close to the ready button, and ready to make potential moves, depending on whether the data worsens or strengthens from here. 

* * * 

Canadian fixed income and the Canadian economy overall is at a very interesting place here relative to the U.S. And I think most of that’s because the U.S. is trying to decouple themselves from not only Canada, but everywhere else around the world. It used to be that a lot of the developed economies would move along with whatever the U.S. economy did — or at least that was the case over the post-World War II era — and I think that those correlations are still going to be relatively high, but I think the correlations of the future, at least over the medium term, are going to be lower. 

To the extent that, OK, the U.S is going to go into recession, you know, 60% chance of recession, I would discount that level from a Canadian fixed-income side, and maybe look at Canadian fixed income being a potential buying opportunity to move into those types of non-dollar trades, whether it’s in Canada or anywhere else around the world. 

* * * 

Because we’re at an interesting point in time, I think there are pockets of opportunity for fixed-income investors through the end of the year. You’re looking at something like structured credit, whether it’s in residential mortgages, commercial mortgages, asset-backed securities. While those spreads have come in and tightened, we think the probability of default is relatively low, and those spreads still give you some advantages over your investment-grade corporate bonds or higher up the credit stack in your high yield, your double-B high yield. You get some more yield, similar amounts of risk, similar amounts of volatility. So we think that’s a very good opportunity for investors. 

Also, given the moves in the U.S. dollar versus the global markets, we think it could be a good time to invest in some non-dollar names. Start legging into those trades. But certainly that’s a potential opportunity, given the market outlook for the dollar, and really try to take advantage of some of that volatility that happens in the non-dollar names, whether it’s in the sovereign space or in the local currency emerging market space. 

And finally, given our outlook for things, we do think that The Fed is more likely to cut rates, not necessarily over the short term, but we think that The Fed is more likely to cut than to hike. And so, have a little bit more of that exposure to the lower end of the Treasury curve, and less exposure to the longer end of the Treasury curve. 

The Treasury curve, on the long end, hasn’t really reacted too much to the Congress passing tax cuts, and a $5 trillion debt ceiling adjustment and the idea of deficits continuing to expand, but we think over the long term, certainly, that pressure is going to continue to push up longer term interest rates higher than they would be if the U.S. Congress got their fiscal house in order. We don’t think that that’s a very likely scenario — at least until they’re forced to buy the bond market — but certainly, that upward pressure on long-term interest rates would force that move, but it’s going to be significantly higher from here. 

So if you were to look at the Treasury curve, we like the short end of the curve. We don’t like the longer end of the curve. And if you are at a place where you can buy shorter-duration assets, we think that those two-year type assets, whether it’s the two-year Treasury curve or shorter duration structured credit, it’s going to do well in that scenario where the shorter end of the Treasury curve rallies and the Fed is cutting rates, whether it’s from a idea of recession coming or the idea that The Fed is just trying to, kind of, more normalize rates. Certainly the Fed is more inclined to cut rates very slightly from here versus raise rates. 

And so those are kind of the places we like in the market today. Picking and choosing, I think the volatility that we saw in the second quarter could continue here over the rest of the year, and provide some opportunities to pick up some relatively cheap bonds, and try to take advantage of some dislocations in the markets to provide good yielding, good spreading assets with very lower amounts of risk.

* * *

DoubleLine® is a registered trademark of DoubleLine Capital LP.

The views expressed in this material are the views of DoubleLine® as of the date of publication unless otherwise indicated, and are subject to change at any time.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

Target maturity bonds that are closing in November 2025 have already realized most of the capital gains that came from purchasing the bonds at a discount, says Pablo Martinez, portfolio manager at CIBC Asset Management. So it’s time to move those funds into other strategies.

This could be the later sleeves of the funds, from 2026 to 2030, he said in a June 11 interview. “Those funds are still trading at a discount, and provide a good GIC-equivalent yield.”

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Martinez said the sleeves available for the next five years have varying qualities.

“2028 and 2030, that’s where we have the best combination of higher yielding bonds that are trading at a discount,” he said. The 2027 and 2029 sleeves have a less favourable combination of price and yield. The 2026 sleeve, meanwhile, is exceptionally liquid, being seen as a popular alternative to money market instruments.

The funds that are maturing this year could also be moved to fixed-income pools, he added. “Those provide greater diversity in asset classes or in geographical region, and a longer-term approach.”

A third option is the corporate bond market, “which provides a higher yield, great diversifier as well, and also goes longer into the yield curve and provides a bit more yield,” Martinez said.

The key factors Martinez considers when searching for a GIC-equivalent yield for target maturity funds are the overall yield of the portfolio, as well as the discount of the bond.

“When we combine both, that’s how we get the best GIC-equivalent yield for the portfolio.”

A closer look at fixed income

Martinez said ongoing tariff uncertainty has resulted in higher inflation and volatility in global bond yields. Still, yields are within trading range.

“The reason for this is that the break higher in yield was limited by fears of economic slowdown that would result from lower international trade,” he said. “So the bond market is seesawing between those two themes: tariffs-induced inflation and slower growth.”

On a positive note, markets are less reactive to daily headlines, and participants are more focused on the ultimate goal of the U.S. administration, he said.

“[This includes] increasing revenues from tariffs to finance a lower tax base [for] corporations and consumers, and also to try to get the deficit in order,” Martinez said.

Uncontrolled spending by the U.S. government remains a key risk, however, and could result in “loss of confidence in the Treasury market,” he said. This could lead to higher yields.

“That being said, a buyers’ strike for the Treasury market is not our base case scenario,” Martinez said.

While the rebound in the corporate bond market provides opportunities for investors, sectors that could be impacted by tariffs, like the automotive industry, could be riskier.

“But the overall corporate bond markets remain a place where there’s still good opportunities,” he said.

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Pablo Martinez, portfolio manager, CIBC Asset Management 

* * * 

To provide an update on the target date maturity funds that were launched about a year and a half ago, what we can say first is that those new funds performed greatly and performed as expected. Clients were able to profit from higher yields from corporate issuers, and also from the capital gains that are derived from purchasing bonds at a discount. 

Clients must understand that those funds were created to profit from a specific opportunity, which arose from an increase in bond yields in 2022, and a favourable fiscal treatment of capital gains. The window of opportunity is still good for those funds but as rates remain relatively stable, discount bonds become scarce as they come to maturity. Clients should have a contingency plan to move funds when the favourable context is no longer there. 

We are in 2025, and the 2025 sleeve of target maturity fund will be closing at the end of November. The fund itself will close and money will be sent back to our clients. We have to understand that most of the capital gains from the discount bonds have already been realized. The bonds in the portfolio now are all trading very close to par. So it would be a good time to deploy the funds into other strategies, whether it is in the longer sleeves of the fund — so we have sleeves in 2026, 2027, 2028, up 2030 — that is one opportunity that’s still there. Those funds are still trading at a discount, and provide a good GIC-equivalent yield. But again, there’s other strategies that we can provide, one of which is in fixed-income pools. And those provide greater diversity in asset classes or in geographical region, and a longer term approach. And also we have, obviously, the good old corporate bond funds, which provide a higher yield, great diversifier as well, and also goes longer into the yield curve and provides a bit more yield. 

* * * 

The performance for those funds will vary depending on the manager, and also the sectors that are being taken. In our case — in the case of the funds that we manage — what we look at is not just the name of the issue or the sector of the issue. The prime decision that we take will be on the GIC-equivalent yield. We derive that yield basically with two things: first will be the overall yield of the portfolio, but also the discount of the bond. 

So when we combine both, that’s how we get the best GIC-equivalent yield for the portfolio, and that, we believe, is what distinguishes us from the competition. It’s our capacity to source bonds that are trading at a discount, and also being able to buy them at the best possible price because of competition. 

* * * 

The later sleeve of the funds provide, obviously, the greatest yield on a GIC-equivalent basis. And it’s quite interesting to see that for each year we have a different set of bonds, some of which offer better yield and a better discount than others. 

For example, when we look at the sleeve for the five years that we have available right now — 2028 and 2030 — that’s where we have the best combination of higher yielding bonds that are trading at a discount. Unfortunately, it depends when those bonds were issued. So the years 2027, 2029 still provide good opportunities, but there’s less of a good combination of both and that’s why we’re seeing a lot of the funds go into the ’28 and ’30 sleeves of the funds. 

2026 is very popular, but what we’re seeing in 2026 is that this fund is being used maybe to provide an alternative to money market instruments, as it provides a higher yield, and those funds obviously are very liquid. 

* * * 

If I can provide an update on the fixed-income market, off the bat what we can say is that global bond yields have been very volatile since the beginning of the year. They’ve reacted strongly to the initial volley of decrees from the White House, and also to the daily tweets from the President. 

But we believe that the big break higher in yields came on what is being called now Liberation Day. On the day that President Trump announced that they were actually going along with imposing tariffs on main trading partners, we have seen rates increase quite materially and quite quickly, mostly on the back of inflation fears. You know, if U.S. imposes tariffs, it leads to higher prices for consumers. 

So already inflation was at the higher end of the central bank’s tolerance band. When you add to this tariffs, well, obviously you’ll get an inflation scare. Add to that the fact that the U.S. budget doesn’t really show any kind of fiscal constraint, and also that the DOGE initiative is not really having the desired impact on reducing government spending, well, you have the perfect recipe for higher yields. 

That being said, the yields moved up, but they remained within our trading range. The reason for this is that the break higher in yield was limited by fears of economic slowdown that would result from lower international trade. So the bond market is seesawing between those two themes: tariffs-induced inflation and slower growth. 

On the corporate bond side, corporate bonds did suffer at the announcement of tariffs, along with other riskier asset classes. But all the lost ground has been recovered as the White House is walking back their aggressive stance initially taken on tariffs. As tariff uncertainty remains in the market, it leads to a very volatile bond market that doesn’t really trade on economic fundamentals, but a lot of it on headline news. 

So our base case scenario still remains that tariffs will be imposed on trading partners. But nobody really knows the magnitude of the tariffs, and which industries and countries will be impacted. So right now, the market is undecided on which will impact rates the most. Will it be the inflation impact of tariffs, or the growth slowdown that might result from lower global trade? 

The positive spin here is that markets now react much less to the headlines, as it did earlier in Trump’s mandate, as participants realize that we have to set aside the daily reality show from the White House, and concentrate on what is the ultimate goal of this administration, which basically is increasing revenues from tariffs to finance a low tax base to corporations and consumers, and also to try to get the deficit in order. 

* * * 

How did the Bank’s June announcement impact fixed income? Well, actually, most of the Bank’s decision was already priced into the market. If we had looked at the futures market right before the announcement, that was priced at about 95%. And reading the comments and listening to what the Bank is saying, we can see that the Bank realizes that the confidence numbers from consumers and businesses are still very low. Most of the consumers and businesses remain very concerned about the trade war. 

So the Bank of Canada wants to make sure, even though confidence is low, they want to make sure that inflation remains contained before dropping rates. Because we have to remember, even though overall inflation is very well within the Bank’s tolerance rate, core measures of inflation remain above 3%, and they’ve been increasing slightly lately. So the Bank doesn’t want to repeat the same mistake it did in 2022, when they underestimated the inflation spike. 

The Bank still has ammunition to drop rates if need be, but they will use it only if necessary, as rates are not that much of a weapon in a trade war environment. Even if you drop the overnight rates, well, that won’t really boost confidence from consumers or businesses. It’s really fiscal measures that are a better tool, not monetary ones. 

* * * 

One key risk that we’re looking at, obviously, is the uncontrolled spending by the U.S. government. A lot of the reason why the Trump administration was put in the White House was to get the fiscal house in order. And in what we’re seeing now, it is not really happening. So when you combine uncontrolled spending by the U.S. government with the protectionist economic policy, well, there’s a risk that this would result in the loss of confidence in the Treasury market, and we’ve seen sign of this. 

And when you get a loss of confidence, that would normally lead to higher yields. Investors will require higher interest rates to invest in the U.S. Treasury market, and that would be very detrimental to U.S. growth, and also to the debt sustainability of the U.S. economy. That being said, a buyers strike for the Treasury market is not our base case scenario, but the risk of this happening has increased materially in the past few months. 

There still remains some places in the market where we can continue to find yield, and that for us is still in the corporate bond markets. So although corporate bonds underperformed early in the year with a drop in the equity markets, the rebound has been just spectacular so far this quarter. 

We believe there’s still good value in the corporate bond market, but we have to be aware that some sectors might be more at risk. Those sectors, of course, which are at the center of the current tariff negotiations, and the first one that comes to mind is car companies. So we have to be aware that the risk patterns have increased for some of the sectors, but the overall corporate bond markets remain a place where there’s still good opportunities.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

As uncertainty in markets continues, collateralized loan obligations (CLOs) offer investors decent yield with near-zero interest-rate risk, says Aaron Young, executive director, head of Client Portfolio Management at CIBC Asset Management.

They’re especially attractive, he said, in today’s economy, marked as it is by trade wars, geopolitical risks and the potential return of inflation.

“All of those unknowns, when investing in a floating-rate security like a CLO, you don’t really have to make decisions on those because you’re getting a floating-rate income product that resets every quarter,” he said in a May 5 interview.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Young added that one of the largest drivers of CLO issuance continues to be merger and acquisition activity. As that’s slowed down, it has impacted CLOs, especially those based on direct loans.

“How much are you going to invest in acquiring new businesses or expanding your business when you have that tariff overhang? As that volume slows down, that has a strong impact on CLOs that are comprised of direct lending or private credit opportunities,” he said.

Direct loans is not a space his team is currently invested in. He prefers the broadly syndicated loan market, which is comprised of leveraged bank loans, and is considered “still very healthy.” That includes AAA-rated CLOs, which make up about 75% of the market.

“These are high-quality, highly structured investments that garner that high-quality rating,” Young said. “And that’s really because the users of these investments are some of the largest and most regulated institutional investors in the world.”

This includes banks as well as life and property and casualty insurance companies, which must meet regulatory capital criteria. Pension funds also use CLOs as a way to “park capital” and “earn a decent income,” he added.

So whether you’re an institutional or personal wealth investor, CLOs offer a chance to earn “high-quality income without going too far down the credit risk spectrum,” Young said.

The key to investing is to use CLOs to diversify core fixed-income holdings as part of an overall portfolio, he said. In fact, CLOs and core corporate bond allocations have lower correlations.

“One’s moving when the other’s not,” Young said. “That’s the kind of golden ticket you’re looking for when you’re trying to put the puzzle pieces together in terms of building a total fixed-income portfolio.”

He suggested investors screen CLO managers to make sure they are experienced, have an understanding of the underlying assets, and have managed those loans through a variety of credit cycles.

“What’s their experience looking at broadly syndicated loans, understanding these companies and issuers, [and] maintaining quality?”

Young noted managers should also understand the structured part of CLOs, including collateralization.

“If you know those three areas, the underlying collateral, the CLO managers, and the structuring of the investment, you can actively allocate to AA- and A-rated securities,” Young said. “You get extra yield pickup.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Aaron Young, executive director, head of client portfolio management, CIBC Asset Management 

* * * 

The outlook for collateralized loan obligations — or CLOs — especially against the macroeconomic backdrop we’re facing right now, remains healthy. Like a lot of credit asset classes, we’ve seen a healthy repricing of the CLO complex. And what that means for investors is, no longer are we facing all-in yields and spread levels that were at very tight ranges. We’ve actually now seen a backup in terms of spread and yield where we think there’s relative value back in the market. And they make a lot of sense as an investment alongside your core fixed-income holdings. 

Now, that doesn’t mean we’re out of the woods yet. That doesn’t mean that CLOs are impervious to all the macroeconomic, geopolitical, trade policy risks that are out there. But in the balance of risk-reward, the yield levels that we now see, even high-quality tranches — triple-A, double-A, single-A — are very interesting from an all-in yield perspective. 

The other thing I would mention is with CLOs — as listeners may know — they have near-zero interest-rate risk or duration risk. So against a backdrop of trade policy disrupting the reliability of the U.S. Treasury market as the global funding market, question marks around where does the Fed go from here? Are tariffs inflationary? Are they going to tip the U.S. economy into recession? All of those unknowns, you don’t really have to make decisions on those because you’re getting a floating-rate income product that resets every quarter. 

* * * 

One of the largest drivers of CLO issuance, even secondary market trading, is the underlying M&A activity and other corporate activities that require companies to come to what we call the broadly syndicated loan market. As that activity dies down, less need to borrow capital in the market. And the way to think about these broadly syndicated loans is they are really the input into CLOs. Without those inputs, you don’t have CLO structures, you don’t have tranches, etc. So as that has slowed down, that has definitely had an impact on CLO issuance. 

We still see it as a very healthy market. Lots of refinancing going into the marketplace, good levels on secondary trading. If you’re looking to buy pre-existing CLOs, still very healthy and still very attractive. 

One of the areas that it may impact more — which we generally have not been a holder of, but it is an area of the market — is CLOs based on direct loans. So not broadly syndicated loans that get issued by banks, but by direct deals much like the private-credit strategies that a lot of investors already have exposure to. As that deal flow dries up with lack of M&A activity in the background unknowns around trade policy — you know, how much are you going to invest in acquiring new businesses or expanding your business when you have that tariff overhang — as that volume slows down, that has a strong impact on CLOs that are comprised of direct lending or private-credit opportunities. Now, again, we don’t really play in that space right now, but that’s an area where you’ve seen some of the new issuance dry up just because there’s not enough inputs to create those CLOs. 

On the other hand, you know, this may be a small blip in the long march of history and direct lending CLOs, or middle-market private debt CLOs are a really interesting part of the market, set to continue to grow. They may just face short-term headwinds right now, which we think the market will work through eventually. 

In terms of broadly syndicated loans and the CLOs based on those, [they are] still very healthy. You need to know the underlying credit risk. You need to know the manager risk. But, at the end of the day, the market’s still functioning really well. 

And I would just remind listeners, for those based in Canada, we generally tend to have a home bias. We think of these markets as very small and niche. There are elements of the CLO market that are unique to just those instruments. But you need to remember, the size of the market itself — the amount of primary issuance secondary trading that goes on in CLOs versus asset classes we’re more accustomed to, like, say, Canadian investment-grade corporate bonds, high-yield — is very large. So there’s ample liquidity there. It ebbs and flows with market direction and with sentiment. But at the end of the day, it’s a very large and diversified market where we can source really interesting opportunities for our fixed-income funds. 

* * * 

For investors, when we hear CLOs, we think of exotic credit derivatives, structured product. We think of things that are really hard to understand. We even think of the Great Financial Crisis and CDOs — or collateralized debt obligations, which were based on subprime mortgages. We understand investors’ kind of knee-jerk reaction to think of those elements.  But CLOs are a bit different, and they’re actually a very well-established market, have been around a long time. The majority of the market is what we call triple-A tranches, or triple-A rated. That’s about 75%-plus of the market. These are high-quality, highly structured investments that garner that high-quality rating. And that’s really because the users of these investments are some of the largest and most-regulated institutional investors in the world. 

The use-case for triple-A, double -A CLOs has really been in bank balance sheets. So, ways to park money, earn attractive income on the balance sheet, but not take a lot of credit risk. And this is borne out by the fact that banks are regulated by different global regulations that require them to measure how much risk they have in their investments at any given point. Insurance companies, lifecos, property and casualty, these are highly regulated entities where their investments have to meet certain regulatory capital criteria. And pension funds use high-quality CLOs as a way to park capital, earn a decent income and, again, not go too far down the credit-risk spectrum where they start to have credit risk that’s equivalent to high-yield or private credit or any other parts of the market. 

So if you think of that as the playbook — kind of high-quality income — that’s really an interesting opportunity for any investor, whether you’re institutional or personal wealth. And that’s really where we see CLOs fitting in in the overall portfolio. It’s a chance to earn high-quality income without going too far down the credit-risk spectrum. 

And the other big element that I mentioned earlier is really the lack of interest-rate risk. And here the fixed-income team, here at CIBC Asset Management, we often talk about the difficulties with managing interest-rate risk, making the right calls. It’s hard to always get it right in terms of where is interest-rate policy going, etc. We’ve lived through the past five years where the market’s been dead wrong. If you can take a portion of your portfolio and remove that interest-rate risk, remove that unknown out of the equation without giving up on yield, that’s an interesting proposition. That’s part of what CLOs offer. 

And then just when you combine it all together, core plus bonds, core bonds, any kind of core corporate bond allocation sits really well alongside CLOs over time. [They have] lower correlations, one’s moving when the other’s not. That’s the kind of golden ticket you’re looking for when you’re trying to put the puzzle pieces together in terms of building a total fixed-income portfolio. 

* * * 

The opportunities with CLOs is access to an asset class that traditionally has not been available to the broader market. Again, it’s really been the area of expertise for banks’ balance sheets, life insurance companies, pension funds, asset managers. And this is a chance for investors across the board to add high-quality income into their portfolios and help diversify the main exposures that they have in their core fixed-income holdings. 

To take advantage of the opportunity, some key points that I think you want to look for is, as you buy CLOs or as you choose managers that buy CLOs: 

• What’s their understanding of the underlying assets that go into these, which is really just loans? What’s their experience looking at broadly syndicated loans, understanding these companies and issuers, maintaining quality, etc.? That’s a key element. 

• The second element really is manager understanding. So you’ve got to remember, every CLO has a CLO manager who’s actively managing that pool of loans. Much like when you’re buying a fund for a client or for yourself, you want to do due diligence on the manager. Make sure they know what they’re doing, they have experience, they’ve invested through many credit cycles, market cycles. Same with CLO managers. So do you have fixed-income PMs who understand the CLO managers, understand their strengths and weaknesses, and making sure they’re diversified across those managers? 

• And finally, structuring. These are in, some ways, structured products. One of the reasons you can get triple-A, double-A quality without giving up too much in yield is because there’s a structural element to it. Things like over collateralization, etc. So, making sure your active manager understands those structuring elements, making sure they understand something as boring as the paperwork that goes into CLOs to make sure it’s on par with what they’re seeing from other issuance CLO managers, etc. 

If you get those three ingredients right, we think you have a lot of opportunities, even beyond just triple-A tranches. If you know those three areas — the underlying collateral, the CLO managers and the structuring of the investment — you can actively allocate to double-A and single-A rated securities. You get extra yield pickup. There is a bit more credit risk and structural risk embedded in that. But if you understand it, the risk is worth it for the reward. 

We think that’s a really interesting area when you combine it with the majority high-quality AAA holdings. That’s really where we like to play in the CLO space.

**

This program is intended for Advisor Use Only. The views expressed in this material are the views of CIBC Asset Management Inc., as of the date of publication unless otherwise indicated, and are subject to change at any time. CIBC Asset Management Inc. does not undertake any obligation or responsibility to update such opinions. This material is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, it should not be relied upon in that regard or be considered predictive of any future market performance, nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this material should consult with their advisor. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “estimates”, or other similar wording. In addition, any statements that may be made concerning future performance, strategies, or prospects and possible future actions taken by the fund, are also forward-looking statements. Forward-looking statements are not guarantees of future performance. These statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results and achievements of the fund to differ materially from those expressed or implied by such statements. Such factors include, but are not limited to: general economic, market, and business conditions; fluctuations in securities prices, interest rates, and foreign currency exchange rates; changes in government regulations; and catastrophic events. The above list of important factors that may affect future results is not exhaustive. Before making any investment decisions, we encourage you to consider these and other factors carefully. CIBC Asset Management Inc. does not undertake, and specifically disclaims, any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise prior to the release of the next management report of fund performance. Past performance may not be repeated and is not indicative of future results. The material and/or its contents may not be reproduced without the express written consent of CIBC Asset Management Inc. ^® The CIBC logo and “CIBC Asset Management” are registered trademarks of CIBC, used under license.

As recession risks loom, Canadians heading to the polls next week are more focused than ever on how politicians plan to improve the economy says Adam Ditkofsky, senior portfolio manager, global fixed income at CIBC Asset Management.

“The real question we need to ask now is how will Canadian leaders look to address rising trade barriers, and how will they look to stimulate a slowing economy, and stabilize both consumers and business confidence,” he said.

Listen to the full conversation on the Advisor To Go podcast, powered by CIBC Asset Management.

Both the Liberals and Conservatives are focused on eliminating interprovincial trade barriers, reducing tax rates and eliminating the consumer carbon tax, he noted in an April 9 interview. Both parties have unveiled a number of initiatives designed to boost GDP and reduce uncertainty surrounding in the economy.

“The question remains, are all these going to be enough?” he said.  

Ditkofsky said the Bank of Canada, which is independent from the government, will play an important role in strengthening markets.

“Should the economy weaken or fall into recession, we think that the Bank will tilt its rate decisions to focus on economic stability, as opposed to inflation,” he said.

Canada’s inflation over the last 12 months has been about 2.2%, he said, in line with the Bank’s target of 1% to 3%.

“In terms of our forecast, we see the overnight rate falling to 2.25% over the next 12 months in our base case,” said Ditkofsky. “But if we do see a recession, which is not our base case scenario at the moment, [we] expect it can go much lower.”

He added that futures markets are pricing in two additional cuts for the Bank of Canada for 2025. One cut would come at the Bank’s June 4 meeting, and the second in September.

What does all of this mean for the fixed income market?

With market risks persisting and volatility remaining high, Ditkofsky suggested low-volatility strategies make “sense right now,” as well as diversified bond portfolios.

He also noted that credit continues to underperform government bonds this year.

“We have been positioning our portfolios over the past few months, reducing credit and moving into shorter-dated corporate bonds, and positioning ourselves into more defensive sectors, such as utilities and infrastructure and telecom,” he said.

“There’s more room for the [yield] curve to steepen as central banks continue to cut rates.” he said. “We feel positioning portfolios for a steeper curve is appropriate, especially as recession fears grow.”

Ditkofsky advised investors to be cautious.

“Things can turn quickly in this market. Maintain their asset mix, be prudent with their portfolios, and don’t just follow the trends in fears of missing out.”

This article is part of the Advisor To Go program, sponsored by CIBC Asset Management. The article was written without input from the sponsor.

Text transcript

Welcome to Advisor to Go, brought to you by CIBC Asset Management, a podcast bringing advisors the latest financial insights and developments from our subject-matter experts themselves. 

* * * 

Adam Ditkofsky, senior portfolio manager, global fixed income at CIBC Asset Management 

* * * 

In terms of reviewing the implications of the upcoming Canadian federal election on the market, really the focus has shifted to how each party looks to address policies surrounding President Trump’s tariffs, which are focused on bringing jobs back to America and reducing the deficit with its trade partners. 

Now, while Canada has been excluded from the April 2nd reciprocal tariff announcement, Canada still faces 25% tariffs on vehicles and steel, both of which have had large negative implications on our economy. Now, of course, it goes without saying that the approach that the White House has taken to announcing policies through the President’s tweets increases political uncertainties in reducing both business and consumer confidence. So, obviously, this has not been good for the markets and increases the risks of a recession. 

And I’m not just talking about Canada. The U.S. faces recession risks as well. We can’t forget, the consumer makes up roughly 70% of GDP in the U.S., and Americans have become addicted to their cheap goods — be it their cars, their Starbucks coffee or pretty much anything bought at Costco or Walmart. So, with the average tariff in the U.S. rising from 2.5% last year to more than 20%, it’s clear they’re also going to feel the impact, which could easily drag down the economy. 

So, the real question we need to ask now is, how will Canadian leaders look to address rising trade barriers, and how will they look to stimulate a slowing economy and stabilize both consumers and business confidence. Now, both the leading parties — the Liberals and the Conservatives — have pledged to support Canadian businesses and reduce Canada’s reliance on the U.S. as an export partner. For example, both are focused on eliminating interprovincial trade barriers, reducing tax rates and eliminating the consumer carbon tax. 

But let’s look at some of the details.  

So, current prime minister and Liberal candidate, Mark Carney, has announced several initiatives, the first being a new $5 billion trade diversification corridor fund, the second being increased tax breaks for seniors, and the third, the elimination of the carbon tax. Now, he’s also announced plans to allow businesses to defer tax payments, and to help boost liquidity and put in place 25% counter tariffs on American-made vehicles, while also pledging to maintain production quotas on Canada’s agri-food sectors. 

Pierre Poilievre of the Conservative platform has also announced plans to reduce taxes and to eliminate the carbon tax, but with some more-aggressive reductions, including the elimination of the carbon pricing on industrial emissions. He’s also announced tax credits on capital gains reinvested in Canada, and that should have very large implications, especially for investors. 

The Conservatives also announced plans to speed up infrastructure projects and want to renegotiate the existing USMCA trade agreement on day one, while suspending tariffs in the interim. 

Overall, both parties appear to be focused on boosting GDP and reducing uncertainty surrounding increased recession risks. However, the question remains, are all these going to be enough? And I suspect we’ll likely see more plans, especially with rising recession risks. 

Now, in terms of what does this mean for rate cuts? Ultimately, the Bank of Canada remains independent from the government, so further rate cut decisions really is data dependent. But in our view, should the economy weaken or fall into recession, we think that the Bank will tilt its rate decisions to focus on economic stability, as opposed to inflation. 

And if we look at the level of average inflation over the past 12 months in Canada, it’s been roughly 2.2%, in line with the bank’s 1% to 3% target. Now, in terms of our forecast, we see the overnight rate falling to 2.25% over the next 12 months in our base case. But if we do see a recession — which is not our base case scenario at the moment — [we] expect it can go much lower. Right now, future markets are pricing in two additional cuts for the Bank of Canada for 2025, which is in line with our forecast, 2.25%, with the next cut being fully priced in for the bank’s meeting on June 4, and the second cut being fully priced in for September. 

* * * 

So, in terms of key trends for fixed-income investors to watch in 2025, the main themes so far this year have been twofold, the first being the widening of credit spreads, representing the difference in yield between corporate bonds and government bonds, which quantifies the level of risk tolerance that investors have or confidence in risk assets, and the second being the continuing steeping of the yield curve, which reflects how much extra yield investors are paid to buy longer-dated bonds, as opposed to shorter-dated bonds.  

Recall that last summer, the yield curve — which we define as the difference in two-year Canada bonds and 30-year Canada bonds — was negative or inverted. Today, it’s positive, with shorter-dated bond yields moving much lower over the past 12 months. 

Now in terms of credit spreads, so far we’ve seen credit underperform government bonds this year, with the credit spread of the FTSE Corporate Bond Index reaching 122 basis points as of April 7, and above the 12-month average of 110 basis points, and well above the 12-month low of 96 basis points in late December of last year. 

Now, we have been positioning our portfolios over the past few months, reducing credit and moving into shorter-dated corporate bonds, and positioning ourselves into more defensive sectors, such as utilities and infrastructure and telecom. It seems this has worked well for us. But now we’re questioning, at what point we can see a buying opportunity for corporate credit. And, unfortunately, right now, it seems to be a little bit early for us to be making those decisions, given the ongoing rhetoric regarding tariffs and increasing risks of recession that are currently unfolding in the market. 

Now, as for the yield curve, we think there’s more room for the curve to steepen as central banks continue to cut rates, and we feel positioning portfolios for the steeper curve is appropriate, especially as recession fears grow. 

* * * 

So, in terms of opportunities for investors, I think it’s important to recognize that there’s a lot of risk in the market right now, meaning we should expect volatility to continue to be high. So in essence, low-volatile strategies make a lot of sense right now.  

So, I think maintaining a balanced portfolio of stocks and bonds is important, especially in this environment where bonds provide investors with good diversification, and this should reduce the risk of the overall portfolio and reduce volatility. 

Now, also, diversified bond portfolios that incorporate a prudent approach to credit is critical in this market to ensure managers are avoiding defaults and minimizing unnecessary risks. 

In our portfolios, we’ve materially reduced low-quality corporate bonds, including high yield, to shield investors from the spread environment that we’re seeing, and we’re only participating in new issues if we’re being appropriately compensated with new-issue spreads. 

But I’ll give investors a couple of tips. One, investors need to look through the noise and focus on a more stable investment horizon. President Trump is tweeting daily, causing markets to be extremely volatile. One minute, he’s positive on trade. The next, he’s tougher. Ultimately, investors need to maintain an appropriate asset mix with appropriate risk parameters that represents their risk tolerance that’s acceptable for their portfolios. 

Now, given recession risks are rising, reducing risk in a portfolio is the appropriate course of actions right now. So, maintaining an appropriate allocation to bonds is prudent in this environment. And again, we’ve positioned our portfolios to be more defensive over the past few months, which should provide investors with increased confidence that we are managing risks appropriately in their portfolios. 

Now the second, simply buying the dips for the sake of buying dips, while enticing, can be very dangerous. Markets are being driven by rising uncertainties and falling confidence. Simply acting on lower price points, while enticing, doesn’t guarantee positive returns. I think investors need to, again, be cautious, because things can turn very quickly in this market, maintain their asset mix, be prudent with their portfolios, and don’t just follow the trends in fears of missing out. Strong bottom-up analysis is extremely necessary right now.

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