Week Ending January 11, 2026

Canadian Yields Drop as BoC Easing Cycle Concludes; Rate Hike Debate Emerges

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Week Ending January 11, 2026

Canadian Yields Drop as BoC Easing Cycle Concludes; Rate Hike Debate Emerges

Executive Summary

📊 Overview

Canadian 10-year yields fell 9bps to 3.40% as markets digest the BoC's completed 275bps easing cycle.

📈 Rates

The overnight rate at 2.25% marks the bottom of the neutral range, with a growing chorus now projecting rate hikes rather than cuts in 2026.

💳 Credit

Credit spreads tightened further—IG to 79bps, HY to 276bps—despite elevated policy uncertainty.

🛡️ Hedging

Institutional consensus favors an up-in-quality rotation, with PIMCO, BlackRock, and BMO preferring agency MBS over corporate credit (BlackRock Global Outlook, Jan 2026).

Central Bank Policy Rates

12-month trajectory

Canadian Yield Curve

Government bond yields by maturity

Credit Spreads

Option-adjusted spreads over treasuries

Market Sentiment

Duration

Neutral

Credit

Cautious

Quality Bias

Positive

Policy Uncertainty

Elevated

Central Bank Watch

Central BankRateLast ActionNext MeetingOutlook
🇨🇦Bank of Canada2.25%-25bps(December 11)March 18, 2026Easing cycle complete at 2.25%; Big Six banks split on 2026 path with some projecting hikes in H2
🇺🇸Federal Reserve3.75%Hold(December 18)January 28, 2026January hold expected; markets see 1-2 cuts in 2026 with terminal rate near 3.25-3.50%
🇪🇺ECB2.00%-25bps(December 12)January 22, 2026Held at 2.0% for fourth meeting; Vanguard expects rates unchanged throughout 2026
🇬🇧Bank of England4.75%Hold(December 19)February 5, 2026December cut exposed MPC divisions (5-4 vote); Goldman sees three cuts to 3% by summer 2026

Market Snapshot

MetricCurrentWeekly ChangeStatus
🇨🇦 Canada 10Y3.4%-9bps—
🇺🇸 US 10Y4.19%+1bps—
IG Spread (OAS)79bps—Tight
HY Spread (OAS)276bps—Tight

Rates Overview

🇨🇦 Canada

  • •Policy stance: BoC easing cycle complete at 2.25% after 275bps of cuts since June 2024; rate hike debate emerging among Big Six banks
  • •Yield curve: 10Y at 3.40% (-9bps WoW), 2Y at 2.57%, 5Y at 2.94%, 30Y at 3.85%; steep curve signals term premium demands
  • •Bank views split: Scotiabank projects 50bps hikes in H2 2026; TD/CIBC see extended hold; RBC sees risks tilted toward hikes
  • •Risk factor: CUSMA renegotiation remains defining wild card for Canadian rate trajectory (CIBC Economics, Jan 2026)
  • •Positioning: Favor 5-7Y maturities; Scotiabank views 5Y at 3.0% as 'too rich' if hikes materialize

🇺🇸 United States

  • •Fed stance: Held at 3.75-4.00%; January hold expected with only 16% cut probability priced (CME FedWatch)
  • •Inflation constraint: Fed divided internally; some pushing aggressive cuts while others favor patience; Powell term expires May 2026
  • •Technicals: 10Y at 4.19% (+1bp WoW); JPMorgan expects 2Y at 3.50-3.75%, 10Y in 4.00-4.50% range through 2026
  • •Institutional view: BlackRock tactically underweight long-duration; Vanguard sees Fed limited below 3.5% neutral rate
  • •Positioning: Neutral duration; intermediate 'belly' provides best mix of ballast and income (Vanguard, Jan 2026)

🌍 Global

  • •Europe: ECB held at 2.0% with eurozone inflation at target; Vanguard expects no change through 2026; <10% Feb cut probability
  • •UK: BoE cut to 3.75% in December with 5-4 MPC vote; Goldman sees three cuts to 3% by summer 2026; gilts expected at 4.32% YE
  • •EM flows: Selective opportunities where real rates exceed 3%; PIMCO recommends global diversification in UK, Australia, Canada
  • •Cross-border: BlackRock short duration in Europe, Australia, Canada sovereigns where sticky inflation persists
  • •Positioning: Tactical long Europe vs U.S. given clearer ECB easing path (JPMorgan, Jan 2026)

Credit Markets

Investment Grade

  • •Spreads: Compressed to OAS +79bps—approaching multi-decade tights; JPMorgan expects widening to 110bps by YE, implying flat excess returns
  • •Quality rotation: PIMCO favors higher-quality bonds and liquidity; prefers IG CDX and agency MBS over lower-quality investments
  • •Agency MBS: 'Very, very cheap' vs IG corporates per BlackRock; recommend rotation to securitized for better liquidity
  • •Canada value: Goldman sees opportunities in AAA CLO tranches and BBB-rated cohorts
  • •Positioning: Up-in-quality; BMO favors IG corporates while underweighting lower-quality HY

High Yield

  • •Spreads: At +276bps, well below 20-year avg of ~490bps; global defaults at 1.4%, expected 2% in 2026 driven by CCC tier
  • •Quality bifurcation: BB prices rising as investors seek yield defensively; CCC spreads widening (Janus Henderson, Jan 2026)
  • •Sector focus: PIMCO cautious on floating-rate debt; favors asset-based lending in aviation and data infrastructure
  • •Risk watch: 'Little margin for error' at current spreads; income will drive returns, not spread compression
  • •Positioning: BB-only; avoid CCC; reduce outright HY exposure; LPL notes high yields still attractive for long-horizon investors

Hedging & Risk Management

Duration Strategy

  • •Stance: Duration management critical in 2026 as rate volatility expectations remain elevated (JPMorgan, Jan 2026)
  • •Target duration: PIMCO sees medium-term U.S. duration as particularly appealing; cash rates heading below intermediate portfolios
  • •Implementation: Barbell approach—short-duration liquidity with selective intermediate exposure; Vanguard favors curve 'belly'
  • •Risk trigger: Scotiabank warns 5Y yields may be 'too rich' if BoC hikes materialize in H2 2026

Volatility & Hedging

  • •Vol environment: CUSMA renegotiation represents defining risk for Canadian fixed income; Fed chair transition in May adds U.S. uncertainty
  • •Leverage risk: BlackRock notes AI-driven capex creating more leveraged financial system vulnerable to yield spikes
  • •Liquidity focus: PIMCO emphasizes maintaining liquidity buffers; valuations suggest complacency in credit markets
  • •Currency: CAD hedging costs elevated given CAD weakness; careful analysis of hedged vs unhedged returns warranted
  • •Protection: Consider swaption overlays for convexity risk; dynamic curve positioning given divergent central bank paths

Institutional Perspectives

TD Securities

Constructive on Canadian duration; sees BoC on extended hold

Rates: Next BoC move is higher, but rate hike is likely a long way off
Credit: Favors quality duration over credit risk at current spread levels
Key Call: 2026 rotation from carry to value as policy paths diverge globally

RBC Economics

Neutral; expects BoC hold through 2026 with risks tilted toward hikes

Rates: BoC done with cuts; rate at 2.25% is 'at the right level'
Credit: Cautious stance appropriate given spread compression
Key Call: Risk of BoC rate hikes as early as H2 2026 if consumer demand materializes

BMO Capital Markets

Modestly constructive on Canadian fixed income; 3-3.5% returns expected

Rates: BoC to hold near 2.25%, Fed to cut toward 3.25-3.5%
Credit: Favors investment-grade corporates, underweight lower-quality HY
Key Call: Bonds can play larger role in smoothing portfolio outcomes

Scotiabank Economics

Hawkish; projects BoC hikes in H2 2026

Rates: BoC to raise rates by 50bps to 2.75% by year-end
Credit: Corporate credit outperformed in December with tighter spreads
Key Call: 5Y GoC at 3% probably too rich relative to equilibrium if hikes materialize

CIBC Economics

Dovish hold; sees no change in overnight rate this year

Rates: Unemployment suggests room for non-inflationary growth before hikes
Credit: Neutral on credit given tight spreads
Key Call: Rate hike is likely a long way off; neither cost-push nor slack likely to pressure BoC

National Bank of Canada

Hawkish; projects rate hikes starting Q4 2026

Rates: 50bps of hikes late 2026; 5Y GoC to 2.65% YE, rising to 3.0% by Q3 2027
Credit: Rate relief along GoC curve will be modest
Key Call: Pulled forward BoC hike timeline due to resilient employment data

PIMCO

Constructive on global duration; favor quality over credit risk

Rates: U.S. medium-term duration particularly appealing; diversify in UK, Australia, Canada
Credit: Favor asset-based finance over corporate; prefer agency MBS, IG CDX
Key Call: Cash rates heading meaningfully below intermediate portfolios; bonds over cash

BlackRock

Cautious on long duration; favor income over duration risk

Rates: Tactically underweight long-term Treasuries; short duration in Europe, Australia, Canada
Credit: Agency MBS 'very, very cheap' vs IG corporates; opportunities in securitized
Key Call: Bond returns driven by income not rate moves or spread compression

Vanguard

Very constructive on high-quality fixed income; favor 40/60 portfolio

Rates: Fed limited below 3.5% neutral; bonds projected at 4% returns over decade
Credit: High-quality U.S. fixed income offers strongest risk-adjusted returns
Key Call: 40/60 portfolio outperforms 60/40 on risk-adjusted basis; intermediate optimal

JPMorgan

Neutral; emphasizes active management and duration management

Rates: 2Y Treasuries 3.50-3.75%, 10Y 4.00-4.50%; duration management key
Credit: IG spreads to widen modestly to 110bps; income in high-quality remains attractive
Key Call: Duration matters in 2026; embrace active management for selectivity

Goldman Sachs

Constructive; sees two Fed cuts in 2026

Rates: Fed may cut twice given labor market stance; diversified duration recommended
Credit: High income in securitized, HY, and EM debt; AAA CLO tranches attractive
Key Call: Easing cycles present opportunities; front-end Treasuries and IG credit to benefit

Janus Henderson

Selective; increasing quality focus in high yield

Rates: Modest economic growth and supportive policy sustain positive HY performance
Credit: BB spreads tightening while CCC widening; increasing selectivity required
Key Call: Market bifurcation between quality tiers; favor BB over CCC credits

Portfolio Implications

🛡️

Conservative

  • •Target duration: 5.5 years — at benchmark with quality tilt
  • •GoC/Provincials 45%: Core anchor; 5-7Y Canadian government bonds preferred
  • •IG Corporates 30%: Quality focus; agency MBS as alternative to corporates
  • •Agency MBS 20%: 'Very, very cheap' vs IG per BlackRock; high-quality yield pickup
  • •Cash 5%: Elevated buffer pending CUSMA and policy clarity
⚖️

Balanced

  • •Target duration: 5.75 years — slight overweight to capture rate moves
  • •GoC/Provincials 35%: Anchor with 5-7Y focus; currency-hedged UK gilts for pickup
  • •IG Corporates 30%: Up-in-quality; favor financials and securitized
  • •HY Corporates 15%: BB-only; reduce CCC entirely; Janus Henderson bifurcation theme
  • •EM/Global 15%: Selective local currency where real rates >3% (Brazil, Mexico)
  • •Cash 5%: Opportunistic deployment for volatility
📈

Growth

  • •Target duration: 6.25 years — extended to capture rally potential
  • •GoC/Provincials 25%: Reduced anchor for more credit exposure
  • •IG Corporates 25%: Active sector rotation; AAA CLO tranches per Goldman
  • •HY Corporates 20%: BB focus only; energy neutral; asset-based lending
  • •EM/Global 20%: Higher EM allocation; PIMCO global diversification theme
  • •Cash 10%: Elevated dry powder given CUSMA and central bank transition risks

Consensus vs Divergence

Where Markets Agree

  • +Bank of Canada easing cycle complete at 2.25%; next move more likely to be a hike than cut
  • +Credit spreads at multi-decade tights warrant up-in-quality rotation; favor IG over HY
  • +Income will drive fixed income returns in 2026, not spread compression or rate declines
  • +Agency MBS and securitized products offer better value than corporate credit at current spreads

Points of Disagreement

  • ?BoC 2026 path: TD/CIBC see extended hold vs Scotiabank/NBC project 25-50bps of hikes
  • ?Fed easing: Goldman sees two cuts vs market pricing one cut
  • ?Duration stance: Vanguard very constructive on extending vs BlackRock tactically short long-end
  • ?Credit risk: Some favor carry in HY vs widespread up-in-quality rotation recommendations

Key Dates Ahead

DateEventRelevance
Jan 22ECB Rate DecisionFirst 2026 decision; hold expected but guidance important
Jan 28Federal Reserve FOMC DecisionHold expected; updated dot plot shapes 2026 rate path
Jan 29Bank of Canada Rate Decision + MPRFirst MPR of 2026; critical for revised growth and rate guidance
Feb 5Bank of England MPC DecisionCut to 3.50% expected; MPC division may create volatility
May 15Fed Chair Powell Term ExpiresLeadership transition could influence Fed policy direction
Jul 1CUSMA Review DeadlineTrade policy uncertainty peak; major implications for CAD rates

Sources & References

  • TD Securities
    Global Strategy Outlook 2026
    December 2025
  • RBC Economics
    Beyond the Forecast: Six Themes for 2026
    December 2025
  • BMO Capital Markets
    2026 Capital Markets Outlook
    December 2025
  • Scotiabank Economics
    Canadian Rates Outlook 2026-27
    December 2025
  • CIBC Economics
    Canada's 2026 Outlook
    January 2026
  • National Bank of Canada
    Monthly Fixed Income Monitor
    January 2026
  • PIMCO
    Cyclical Outlook: Seeking Stability
    January 2026
  • BlackRock
    2026 Global Macro Outlook: Patience
    January 2026
  • Vanguard
    2026 Economic and Market Outlook
    December 2025
  • JPMorgan
    2026 Year-Ahead Investment Outlook
    January 2026
  • Goldman Sachs
    Investment Outlook for Public Markets
    January 2026
  • Janus Henderson
    High Yield Bonds Outlook 2026
    January 2026