After a year of steady performance, fixed income markets could kick off 2026 with concerns from a macroeconomic standpoint, says Steve Locke, chief investment officer of fixed income and multi-asset strategies at Mackenzie Investments.
“We’re seeing some fiscal and GDP tailwinds that are going to start to form fairly early in the new year. In particular, for the U.S. market where some of the tax and regulatory changes coming through the ‘one big, beautiful bill’ that were announced in the summer are going to be implemented into the new year.”
He also warned despite an easing bias, the U.S. Federal Reserve isn’t likely to be easing policy at each of its meetings next year but could possibly move to a neutral stance, resulting in a positive market for public equities.
“For fixed income, the implication there is that we have a little bit more benign movement from central banks generally.”
The Bank of Canada is expected to cut its policy rate in 2026 as it faces the adverse effects of a slowing economy with limited productivity gains and structural headwinds from the consumer side, he adds. He expects to see cuts that are higher than what’s priced in currently over the next 12 months, potentially up to 325 basis points.
Canada is expected to continue facing geopolitical volatility with the U.S. and uncertainty around trade policy with the anticipated renegotiations of the United States-Mexico-Canada Agreement.
“All in all, for the bond market in Canada, we see a fairly benign set of circumstances with potentially some demand for debt capital to be raised in the second half of the year.”
Read: Bank of Canada interest rate hold offers de-risking opportunity for institutional investors: expert
In 2025, the Bank of Canada’s goal was to get rates down to at least neutral after starting to cut in 2024, says Robin Marshall, director of global investment research at FTSE Russell.
However, following the intensifying trade conflict between the U.S. and Canada, it sealed the deal for more rate easing by the Canadian bank authority, he adds. While 2026 may be a slower year for moves on rates, it could prove tougher given the current neutral rate position.
“There’s been a relative cheapening of fixed income, particularly government bonds, although they’ve still done OK — they’ve cheapened up significantly against both credit and equities. From that point of view, they’ve got kind of relative value and relative attraction.”
For institutional investors, particularly liability-driven asset owners, he says these opportunities may be attractive even if they’re off the highs of previous years. “They’re still pretty good in the context of where the repricing of equities has gone and their overall surplus. They’re in a better position from that point of view. . . . Fixed income has relative value in all of this but it’s not quite the standout in absolute yield terms.”