Market Commentary
During the fourth quarter of 2025, both the U.S. Federal Reserve (Fed) and the Bank of Canada (BoC) continued their easing cycles. The Fed reduced the target range for the Fed funds rate by 25 basis points (bps) on October 29, bringing it to 3.75%–4.00%, and followed with another 25-bps cut on December 10, lowering the range to 3.50%–3.75%.
The BoC cut its policy rate from 2.50% to 2.25% on October 29 and subsequently held rates steady through its December meeting, effectively pausing further easing. Delays in additional rate cuts risk further weighing on growth and reinforcing recessionary and disinflationary forces, which would place additional downward pressure on long-term yields and enhance capital appreciation potential in long-duration Canadian bonds.
Canada’s economy weakened meaningfully in October, with real gross domestic product (GDP) contracting by 0.3% amid labour disruptions and new trade barriers. Eleven of twenty industrial sectors declined, with both goods-producing (-0.7%) and services-producing (-0.2%) industries contracting.
Manufacturing fell 1.5%, driven largely by a 7.3% decline in wood products following the introduction of U.S. lumber tariffs. Mining and energy output declined 0.6%, retail trade fell 0.6%, and construction decreased 0.4%. Widespread labour disruptions, including a sharp decline in postal services due to Canada Post strikes, further impaired activity. Offsetting these declines, the financial sector reached a record high, supported by increased equity and debt issuance.
Canada October GDP, Components
Source: Statistics Canada
Statistics Canada has issued an early estimate pointing to a modest 0.1% rebound in November. The BoC continues to adopt a cautious, data-dependent stance.
U.S. real GDP grew at an annualized rate of 4.3% in Q3, though the composition was more moderate than the headline suggested. Approximately 1.55 percentage points of growth came from an improved trade balance, reflecting higher energy exports and slower goods imports amid tariffs. Government spending contributed 0.4%, while consumer spending rose 2.4%. Overall, the data pointed to solid but not overheating growth.
The U.S. employment outlook has become increasingly uncertain. A prolonged government shutdown has impaired the quality of official labour market data. Private-sector indicators suggest a more pronounced slowdown: ADP reported minimal job growth, with payroll gains close to zero since the summer, a sharp deceleration from prior years. Small business employment data from Paychex also show ongoing year-over-year contraction.
United States ADP Employment Change
Source: ADP
Political tensions intensified during the quarter following public accusations against Federal Reserve Chair Jerome Powell regarding congressional testimony. Chair Powell strongly reaffirmed the Federal
Reserve’s independence, a position broadly supported by global central banks.
Despite the controversy, monetary policy easing is likely to continue. Following the December rate cut, Chair Powell noted that average monthly U.S. job growth since April 2025 has slowed to roughly 40,000 and may be overstated by approximately 60,000 per month, implying net job losses over that period after revisions. This acknowledgment further supports the case for additional policy accommodation.
Volatility and revisions in Canadian labour data have undermined confidence in near-term economic readings. The October GDP contraction may mark the early stages of a broader recession, a risk not yet fully reflected in Canadian fixed income markets.
In recessionary environments, long-term government bond yields typically decline as investors seek to lock in higher yields ahead of accelerated policy easing. Currently, the Government of Canada 30-year yield stands at approximately 3.80%, about 126 bps above the 2-year yield, which closely tracks the policy rate.
If the BoC lowers its policy rate from 2.25% to 2.00%, the 30-year yield could decline toward 2.25%, implying a potential capital gain of 20% or more. A flattening yield curve could drive yields even lower, toward 2.00%, increasing upside further.
From a fundamental perspective, market pricing continues to underestimate the lagged economic impact of tariffs, reinforcing the attractiveness of long-duration Canadian government bonds
CHART - Government of Canada 30-year yield (brown LHS) vs 2-year yield (green RHS)
Source: Thomson Reuters
Fund Performance and Positioning
The Tactical Sovereign Bond Fund underperformed its benchmark in Q4, returning -1.2% versus the benchmark’s -0.5%. As of quarter-end, the Fund’s Effective Duration was 7.4 years, with the majority of exposure concentrated in long-dated Government of Canada bonds.
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. Federal Reserve’s independence, a position broadly supported by global central banks.