Head of fixed income at Jarislowsky Fraser explains why long bonds, private credit could bite in 2026
Lower policy rates, heavy fiscal stimulus and a hot US economy may look like a friendly backdrop for institutional investors heading into 2026. Yet, according to Marc-André Gaudreau, the real story is the mounting tension between supportive growth policies and the unresolved risks building at the long end of the curve and inside private markets.
The head of fixed income and portfolio manager for Jarislowsky Fraser Core Fixed Income team believes policymakers will remain focused on the real economy, not markets, and institutional investors will need to anchor their expectations to that reality. Gaudreau, who’s also vice-president, senior portfolio manager for the Scotia Global Asset Management Specialized Credit team, noted that both the Federal Reserve and the Bank of Canada operate with two priorities - price stability and employment - but the balance between the two has shifted. After years of over stimulus and near-zero rates, inflation became the dominant concern.
Now, the two banks are now moving at different speeds, yet both have clearly pivoted away from pure inflation-fighting and toward keeping growth and jobs intact. However, that pivot hasn’t exactly played out the way textbook rate cycles usually do, he said. When the Fed kicked off cuts in the fall of 2024 with an outsized move, the bond market refused to cooperate.
“Powell decided to cut by 50 basis points, and I think it’s a very bad risk management decision to decide to cut by 50 basis points versus 25,” said Gaudreau. “Usually when you cut by 50, it’s because things are blowing up and you’re behind the curve, but they were not.”
He suggests the reaction was stark because, from a market standpoint, when central banks start cutting, “what you see further out the curve is longer maturity bonds. The yields come down, because now we’re entering into a cutting cycle. That didn’t happen. 10-year-yields have risen, and they’re still higher than when they started. That’s a really big rejection from the bond market,” he said.
Now with the US election behind them and a Trump administration committed to large-scale fiscal stimulus, Gaudreau expects the Fed’s focus on employment to continue. He anticipates a new Fed chair more amenable to running the economy “hot,” shifting further away from the inflation-first stance of recent years. He expects this will define much of the policy environment for 2026.
The fiscal impulse is central to his constructive economic view. US households are set to receive backdated tax credits, “roughly two thousand dollars on average,” he noted, landing in the first half of 2026.
Meanwhile, corporations will benefit from accelerated expensing of capital expenditures. Deregulation across energy, banking, and telecom will add additional momentum. And with equities near record highs, credit spreads tight, and banks willing to lend, he believes the US economy could re-accelerate after a weak patch in late 2025.
This creates a nuanced fixed income landscape. Gaudreau does not find long-duration bonds attractive given the risk that a stronger economy pushes yields higher again. Instead, he favours medium-term bonds, those maturing in three to six years, where investors can still lock in yields above expected overnight rates without taking on excessive mark-to-market risk.
He also argues that the credit environment should remain broadly stable if growth strengthens. Defaults are unlikely to spike, but valuations already look full. As a result, he sees limited upside in broad beta exposure. The opportunity, he said, is less about broad market bets and more about selecting individual companies who stand to benefit - what he also calls “alpha generation.”
“It'll probably be more of a plain vanilla alpha generation, finding the companies which will benefit from all this versus the other ones,” said Gaudreau, adding that he does not foresee a hard recession in either Canada or the US, given the incoming stimulus.
For pension plans and institutional allocators, the danger lies in the interaction between rising long rates, softer risky assets and illiquid private holdings that do not reprice in real time, underscored Gaudreau.
Gaudreau explained that rising long-term rates can reduce pension plan liabilities, improving accounting metrics but only if risky assets don’t lose value, pointing to market results in 2021 and 2022. He warned that heavy allocations to private markets could create complications. Notably, if long rates rise and public assets like bonds and equities drop while private holdings remain illiquid, pension plans could face pressure.
That risk is compounded by the fact “it’s hard to get access to it. It’s hard to rebalance. And everyone still has a lot of private,” he said.
The challenge for institutions now is not just about strategic splits; it is also about stress testing for second- and third-order effects that show up outside the obvious weak spots. Private-heavy sectors like certain insurance firms and university endowments already offer warning signs.
Gaudreau believes keeping more liquidity, leaning on public fixed income when it offers value, can ensure portfolios respond quickly when volatility returns. However, he also warned that as companies gain confidence and take on leverage to fund growth, particularly in areas like AI, credit trends could gradually weaken.
After all, according to Gaudreau, credit metrics in private markets have been deteriorating for the past two years. Due to the opacity of these investments, early warning signs may only be visible now.
Ultimately, Gaudreau underscored pension plans need a clear, forward-looking strategy for a potential spike at the long end, driven by deficits, a less price-insensitive marginal buyer and a Fed that might eventually embrace a third unofficial yield curve control mandate.
“If I’m a pension plan, I have to be preparing for the possibility of long rates to spike eventually. You have to have a game plan that if 30 yields in the US spike up to five or six per cent, you know that the fed is going to do something. You’ll probably want to buy or lock some of that in before the Fed comes in,” noted Gaudreau.
