Market Insights | January 2026
Recession Risk Rising: The Case for Canadian Long Bonds Strengthens
Key Takeaways:
- Canada Nears Technical Recession: Weak Q4 growth, declining per-capita output, and housing softness point to an economy already contracting beneath the surface.
- Inflation Trend Turning Lower: Disinflationary forces are building as trade uncertainty and reduced spending power weigh on demand.
- Recession Not Priced In: Canadian long bonds do not yet reflect recession risk, creating asymmetric upside potential.
- Bull Flattening Setup: A modest decline in policy rates could drive a sharp compression in long yields and meaningful capital appreciation.
- U.S. Easing Bias Remains: Softer inflation and downward payroll revisions reinforce the Federal Reserve’s flexibility to cut further.
Canada: Growth Stalls, Recession Risk Builds
Canada’s November real Gross Domestic Product (GDP) was effectively flat, with Statistics Canada estimating modest 0.1% growth for December. Combined with October’s 0.3% contraction, Q4 real GDP likely declined approximately 0.2%.
While central banks rarely forecast recessions explicitly, the Bank of Canada’s projected 1.1% growth for 2026 signals an economy operating at stall speed. Trade uncertainty remains a cited risk, but structural challenges—including weak productivity growth, stagnant GDP per capita, and housing weakness in the Greater Toronto Area—are contributing to broader economic fragility.
Canada Real GDP, month over month
Source: Statistics Canada, Tradingeconomics
Inflation: Disinflationary Forces Emerging
Canadian Consumer Price Index (CPI) continues to trend lower. Tariff-related price increases represent one-time adjustments, but the erosion of purchasing power is lasting. Combined with subdued demand and economic uncertainty, this dynamic reinforces downward pressure on inflation.
Lower inflation expectations historically translate into lower long-term yields and higher long-duration bond prices.
Chart: Canada CPI (Consumer Price Index), Monthly
Source: Statistics Canada, Bloomberg
Bond Market Positioning: Recession Underestimated
Despite deteriorating macro conditions, the recession narrative remains absent from consensus forecasts. Canadian bond markets have not fully priced in a contraction.
Recent price action in long-duration Government of Canada bonds suggests a base formation followed by an upside breakout—an early technical confirmation of shifting expectations.
Chart: Government of Canada 2.75% of 01 December 2055 Bond. Price Chart
Source: Bloomberg
Hidden Value in Canadian Long Bonds
In recessionary environments, long-term yields typically decline sharply as investors lock in higher income before central banks accelerate easing. This “bull flattening” dynamic often drives long yields toward short-term rates.
Currently:
If the Bank of Canada lowers its policy rate from 2.25% toward 2.00%, the 30-year yield could decline toward 2.25%—a move of roughly 145 basis points. Such compression implies capital gains of 20% or more. A full curve flattening could drive yields even lower, amplifying returns.
Market pricing continues to underestimate the lagged economic effects of tariffs and weak domestic demand, reinforcing the opportunity in long-duration Canadian government bonds.
CHART : Government of Canada 30-year yield (brown LHS) vs 2-year yield (green RHS)
Source: Thomson Reuters
United States: Inflation Eases, Policy Flexibility Expands
U.S. January CPI came in slightly below expectations despite a temporary spike in airfare. Broader inflation components continue to moderate.
While January payrolls exceeded expectations, the annual benchmark revision reduced previously reported employment by 862,000 jobs. This aligns closely with earlier Federal Reserve commentary suggesting persistent overstatement in payroll data.
With inflation softening and labour market revisions underway, markets may be underestimating the Federal Reserve’s willingness to ease further.
Incoming Fed Chair nominee Kevin Warsh has suggested that artificial intelligence could act as a structural disinflationary force through productivity gains—reinforcing longer-term downward pressure on inflation.
Outlook and Implications
Recent equity volatility has triggered renewed demand for safe-haven assets. U.S. Treasury auctions have been well received, and sentiment toward sovereign bonds has improved materially.
In Canada, structural economic headwinds remain unresolved, reinforcing the constructive outlook for long-duration government bonds.
The commentaries contained herein are provided as a general source of information based on information available as of January 31, 2026 and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication however, accuracy cannot be guaranteed. Market conditions may change and Caldwell Investment Management Ltd. accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
Published on February 27, 2026