Tariff-driven fixed income opportunities for your investment portfolio

From a bond fund manager point of view, one of the things we’re paying especially close attention to is government debt. As alluded to earlier, Canada has imposed a number of counter-tariffs on U.S. imports to Canada in response to U.S. tariffs. This will have an impact on Canadian businesses and consumers. Both federal and provincial governments are adamant that they’ll be here to help businesses and consumers weather the repercussions. And this means higher government debt.

Provincial bonds

With the Canadian federal government temporarily prorogued, the initial round of emergency help will most likely be provided primarily by the provinces. To help pay for it, the provinces will need to borrow by issuing more bonds. The more debt you take on, the higher your risk of not being able to pay it back. So to compensate investors for this perceived higher risk, the new bonds will most likely have a slightly higher yield than any similar bonds currently available.

Investment grade corporate bonds

Opportunities can also be found in investment grade corporate bonds. But careful industry and sector selection is key. And if we do end up in a trade war, the U.S. will probably fare better than Canada at the onset. This is why, at the moment, we tend to favour U.S. corporate bonds and Canadian bonds from corporations that have a high U.S. presence.

At the same time, when tariffs are announced, there is an immediate reaction from the industries which will be the most affected. For example, when talk of tariffs resurfaced in late February, car company bond spreads almost instantly widened. The spreads narrowed once the tariffs were delayed, but those spreads are still wider than what we’ve seen in past months. And chances are they’ll go wider.

So what we’re doing right now is playing it defensive. We’re lower weighted in corporate bonds than we’ve been in the past few years. We want to have ammunition on hand to spend if we feel the market is punishing corporations too much because of current tariff threats.

In spite of all the tariff uncertainty, for the year, we still believe that rates will trade in the same kind of range they did last year. This means 10-year Government of Canada Bonds trading in a 100 basis point (bps) range.

We believe this range will be maintained because there’s going to be a bit of a fight between higher rate, which will be caused by higher inflation from tariffs, and lower rates caused by lower economic growth.

As tariffs are announced and delayed, announced and delayed, the market will most likely be very volatile. Accordingly, to position our fixed income investment solutions for ongoing performance, we’ll be long when rates are moving up so that we can play the range, and short when rates are moving down on bad tariff news.

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