Market Insights | November 2025
Canadian Long Bonds: Rising Recession and Strengthening Capital Gain Potential
Key Takeaways:
- Growth Pressures Intensifying: Canada continues to experience stagnant per-capita GDP, revealing structural weaknesses that monetary policy alone cannot resolve.
- Delayed Rate Cuts Add Downside: A slower easing cycle increases recessionary pressure, reinforcing the downward trajectory for long-term yields.
- U.S. Labour Data Mixed: Solid payroll gains mask rising unemployment and weakening sentiment, reinforcing expectations that the Fed will continue cutting in December.
- K-Shaped Economy Deepening: Zero real wage growth and collapsing consumer sentiment highlight widening divides between asset owners and non-owners.
- Compelling Long-Bond Setup: With the 30-year yield far above the policy-driven 2-year yield, a recession-driven curve flattening implies significant capital appreciation potential.
Canadian Macro Landscape
A Weak Decade for Productivity and Living Standards
Canada’s economic performance continues to lag. Gross Domestic Product (GDP) per capita has been effectively flat for a decade, meaning all headline growth has been driven by population increases rather than productivity or output gains. Compared with the U.S., Canada’s structural challenges, particularly trade competitiveness, regulation, and taxation, remain pronounced.
The Bank of Canada’s (BOC) insistence that further rate cuts offer limited benefit underscores these structural deficiencies. However, delaying additional easing risks amplifying recessionary forces and strengthening the disinflationary impulse, conditions that push long-term yields lower and enhance the capital gain potential in long-duration bonds.
Real GDP per Capita (Indexed to 2015=100)
United States vs Canada (Quarterly, 2015-Q1 2025)
Source: FRED (Federal Reserve Economic Data), Statistics Canada
U.S. Data and Market Dynamics
Mixed Employment Signals
The U.S. September employment report showed a stronger-than-expected payroll gain of 119,000, renewing fears that the Fed might pause cuts. Yet the unemployment rate rose to 4.4%, with household data pointing to deeper softening beneath the surface.
Reassurance quickly followed. New York Fed President John Williams signaled that a December rate cut remains likely, a message generally interpreted as being aligned with the Fed Chair’s direction. Markets recovered promptly, reversing most of the prior week’s losses.
The K-Shaped Divide
Inflation at 0.3% month-over-month matched the gain in average hourly earnings, leaving real wage growth effectively at zero. This divergence between rising prices and stagnant real income disproportionately impacts lower-income households.
The University of Michigan Consumer Sentiment Index fell to 51.0, its second-lowest reading on record. Unlike pre-pandemic trends, consumer sentiment no longer tracks equity markets, reflecting the disparity: asset owners continue to benefit from rising prices, while households without assets face ongoing financial strain.
Canadian Data Reliability Concerns
Severe volatility in Canadian employment statistics has weakened confidence in official labour market data. Business and consumer surveys from the BOC provide a more stable signal, and indicate that Canada is likely already in recession or nearing one.
The “K-Shaped” Economy
Source: University of Michigan, S&P, Bloomberg
Outlook and Implications for Long Bond
Recession Favours Long-Duration Assets
In recessionary environments, investors typically rotate into long-term government bonds to lock in higher yields before the central bank eases more aggressively. This dynamic pushes long yields sharply lower.
Today, the Canada 30-year yield stands at 3.62%, more than 120 basis points above the 2-year yield at 2.42%. Historical patterns suggest that during recessions, the curve often flattens or fully inverts.
If the policy rate falls toward 2.00%, the 30-year yield could also move toward 2.25%, a decline of roughly 137 basis points, implying capital gains of 20% or more. A full flattening could push the 30-year yield as low as 2.00%, amplifying those gains further.
Current market pricing significantly underestimates the lagged effects of tariffs and the broader disinflationary impulse, reinforcing the strong total-return profile of Canadian long bonds.
CHART – Government of Canada 30-year yield (black LHS) vs 2-year yield (green RHS)
Source: Thomson Reuters
The commentaries contained herein are provided as a general source of information based on information available as of November 25, 2025 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 November 27, 2025