Within an institutional investor’s Canadian fixed income allocation, a subtle but consequential risk is present
The U.S. remains the standout among advanced economies, with real gross domestic product (GDP) growth projected to be anywhere from 1.6% to 2.2% this year, according to our Capital Research Strategy group. Solid labour dynamics, firm consumer spending, and a politically motivated policy backdrop continue to provide support.
However, several risks warrant attention.
The first is tariffs. Though the probability of renewed tariff escalation appears low ahead of the U.S. midterm elections, the risk remains, nonetheless. Plus, if there’s any meaningful weakening in real growth and labour market stability, it could challenge the current consumption-driven expansion.
Canada: Slower but stabilizing
Canada enters 2026 on a more moderate growth path, with real GDP expected to come in at around 1%, with inflation hovering close to target. Labour market gains are likely to unfold slowly, while reduced immigration continues to temper overall economic momentum.
A smooth CUSMA (Canada-United States-Mexico Agreement) renegotiation, combined with stronger fiscal support, could help reduce uncertainty and lift economic performance in the second half of the year — potentially pushing GDP growth above potential, causing some upside inflation risk. The Bank of Canada is anticipated to keep its policy rate at 2.25% with the possibility of one hike in 2026.
Concentration challenges in Canadian corporate bonds
Within an institutional investor’s Canadian fixed income allocation, a subtle but consequential risk is present. While Canadian government bonds remain the anchor for liability-driven investment strategies, the heavy reliance on domestic corporate credit introduces concentration challenges that are often overlooked.
The long Canadian corporate bond market is heavily concentrated in the utilities and energy sectors, accounting for 57% of the Bloomberg Canadian Corporate 10+ years bond index. This dominance gives both sectors an outsized influence on long-term corporate bond performance.
Concentration risk is further amplified by issuer composition: the top 20 issuers in the Bloomberg Canadian Corporate 10+ years bond index make up 64% of total long-term corporate bond issuance, underscoring how reliant the market is on a small group of borrowers.
U.S. market comparison
By contrast, the U.S. long corporate bond market is far more diversified. The top 20 issuers represent only 25% of the Bloomberg US Corporate 10+ years bond index, with issuance spread across a much broader range of sectors. This comparison highlights the unique concentration challenges embedded in the Canadian market relative to its U.S. counterpart.
A more diversified approach, implemented through a CAD‑hedged allocation to U.S. long investment-grade corporate bonds, can broaden issuer, sector, and geographic exposures — strengthening portfolio resilience without compromising liability alignment.
The rise of multi-asset credit in institutional portfolios
In the context of a liability‑aware institutional investor, it is essential to clearly define the role of multi-asset credit (MAC). The most logical and effective approach is to treat MAC as a return‑seeking fixed income sleeve that stands alongside the liability‑hedging portfolio.
The central question is not whether an allocation mimics the characteristics of Canadian bonds, but whether it enhances the plan’s overall risk and return profile without weakening the liability hedge.
MAC complements Canadian public credit by addressing structural concentration and lower yields found in Canada’s fixed income universe. Through a multi‑sector approach — which may include investment-grade (IG) bonds, high-yield (HY) corporate bonds, securitized debt, and emerging markets (EM) credit — investors can expand diversification and broaden return drivers.
How MAC complements private debt
MAC strategies focused on publicly traded bonds pair well with private debt funds for three key reasons:
- Liquidity with return potential: Private credit embeds an illiquidity premium that constrains rebalancing. Multi‑sector credit offers optional liquidity, improving the dynamic efficiency of total fixed income exposure.
- Diversification of default and recovery profiles: Private debt tends to focus on real estate, mortgage, and infrastructure loans, while multi‑sector credit spans IG, HY, securitized debt, and EM credit — each with different risks and legal frameworks.
- Complementary income streams: Private credit provides contractual, stable income; MAC adds liquid and globally diversified spread exposure. Together, they deliver balanced yield, resilience, and flexibility throughout the credit cycle.
Building a more resilient, diversified fixed income framework
The evolving investment landscape presents both challenges and opportunities for institutional investors, underscoring the need for portfolio construction that balances resilience with return potential.
While the U.S. economy maintains momentum and Canada moves through a slower, but stabilizing, environment, structural concentration in Canada’s fixed income market highlights the need for thoughtful diversification.
A strategic blend of long‑duration U.S. and Canadian investment-grade bonds, private debt, and multi‑asset credit can broaden the opportunity set, strengthen flexibility, and enhance long‑term outcomes.
By integrating liquidity, global spread exposure, and diversified income sources, defined benefits plans can better navigate uncertainty while capturing the benefits of a more dynamic and efficient liability‑aware fixed income allocation.
Naoum Tabet is a fixed income investment director at Capital Group. He is based in Montreal.
