Where fixed income investors need to focus

In September, the Fed reduced its target range by 25 basis points to 4.00 to 4.25% — a move characterized as a “risk management” cut that was warranted given rising downside risks to employment, and core Personal Consumption Expenditures (PCE) inflation remaining stubbornly near 3%. The Federal Open Market Committee’s (FOMC) latest projections suggest a stronger easing bias, with expectations for two more cuts by year-end, and a further cut in each of 2026 and 2027. However, the committee remains divided between those concerned about persistent inflation and those focused on labour market risks.

In Canada, the economic backdrop is more fragile. The BoC lowered its overnight rate to 2.50% amid a 1.6% GDP contraction in Q2 and a rise in unemployment to 7.1%. Wage growth has lagged inflation, and business investment remains subdued. The BoC’s communications stress a data-dependent, gradual approach, with policymakers cautious about committing to a rapid series of cuts.

Yield curves in both countries have shifted meaningfully. In the U.S., the curve has steepened as policy easing prompted front-end yields to fall, while long-end yields remain anchored by fiscal concerns. The 10-year U.S. Treasury yield ended the quarter at 4.13%. In Canada, the curve has normalized, with 5- and 10-year government bonds yielding 2.74% and 3.17%, respectively. This normalization has improved the risk-reward profile for extending duration.

Credit markets remain buoyant, with investment-grade and high-yield spreads compressing to multi-year lows. Notably, Oracle’s $18 billion USD bond issuance in September was four times oversubscribed, underscoring robust demand for yield.

Looking ahead, the economic outlook is shaped by a complex interplay of growth, inflation and policy credibility. In the U.S., growth is expected to slow, and inflation is projected to remain above target before gradually easing. In Canada, recovery is likely to be slower, with the BoC maintaining a cautious approach.

Given tight credit spreads and potential market volatility, CIBC Asset Management maintains a preference for high-quality assets, prudent duration extension and active relative value positioning — particularly in the BBB segment. Diversification, liquidity and close monitoring of policy developments remain essential as investors navigate evolving central bank strategies and fiscal dynamics.