Market Commentary
Geopolitical tensions in the Middle East kept energy prices elevated through April, sustaining near-term inflation concerns. Short-term government bond yields in Canada and the U.S. edged higher, pulling longer-dated yields higher as well, though to a lesser degree.
Recent earnings commentary from consumer-facing companies points to mounting pressure on household budgets as non-discretionary spending on food and energy absorbs a larger share of income. Costco cited consumers trading down from beef to chicken or canned tuna, while Kraft Heinz and McDonald’s reported similar trends among lower-income cohorts. The University of Michigan Consumer Sentiment Index fell to an all-time low in April. In Canada, while comparable high-frequency consumer data are more limited, labour market conditions weakened. Statistics Canada reported an 18,000 decline in employment in April, including a 46,700 decline in full-time jobs. Employment has declined by a cumulative 112,000 jobs during the first four months of 2026, while the unemployment rate rose to 6.9% from 6.7% in March.
Economic weakness in Canada has begun to offset inflation concerns, contributing to Canadian government bonds’ outperformance relative to U.S. Treasuries. Within Canada, long-dated bonds also outperformed the short end, resulting in yield-curve flattening.
While the outcome of the conflict remains uncertain, the demand impact is already evident. The longer the disruption persists, the greater the potential for demand destruction as higher energy and food costs crowd out discretionary spending.
The recent increase in short-term yields appears largely reactive to inflation concerns. Longer-term yields are expected to resume their decline as weaker economic data continue to emerge.
Fund Performance and Positioning
The Tactical Sovereign Bond Fund remains positioned for a weaker Canadian economy, with exposure to 30-year Government of Canada bonds as a core component of the strategy. Active trading within this allocation has improved the Fund’s average cost, while duration has been modestly reduced through a smaller long-bond position.
The Fund also maintains a long U.S. dollar position relative to the Canadian dollar, consistent with expectations that softer Canadian economic data will weigh on the currency. This exposure has also been actively traded, further improving the Fund’s average cost.
For April, active foreign exchange trading was a top contributor to Fund performance, however, these gains were more than offset by lower bond prices. The Fund returned -0.13% in April, trailing its benchmark by 0.19% for the month. Year-to-date, however, the Fund remains ahead of its benchmark by 0.68%.
While capital preservation remains a key tenet of the Fund’s strategy, the Fund benefits from its ability to capitalize on evolving market dynamics within bond and currency markets.
Outlook
Elevated energy prices are likely to flow through to additional categories at a time when consumers in both Canada and the U.S. are already moderating spending. Slower growth and rising recession risk in Canada should place downward pressure on long-term bond yields and may eventually require central banks to reduce short-term policy rates. As the yield curve flattens, consistent with prior recessionary periods, lower Canadian long-bond yields should support bond prices and Fund performance.
Chart of the Month
University of Michigan Consumer Sentiment Index
Source: University of Michigan, Bloomberg
The University of Michigan Consumer Sentiment Index fell to 48.2 in April, below levels reached during COVID and the 2008 financial crisis. The decline is notable because it occurred while major U.S. equity indices were near all-time highs. One explanation is that equity-market gains remain highly concentrated: Federal Reserve data as of late 2023 indicate that the top 10% of U.S. households owned a record 93% of all stocks and mutual fund shares, while the bottom 50% owned only 1%. For many households, equity-market strength has therefore provided limited offset to deteriorating financial conditions.