Week Ending January 25, 2026

Central Banks Pause as Markets Price Inflation Persistence

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Week Ending January 25, 2026

Central Banks Pause as Markets Price Inflation Persistence

Executive Summary

📊 Overview

Central banks maintained cautious stances this week as inflation persistence concerns mounted, with the Fed expected to hold at next week's meeting and BoC signaling extended pause.

📈 Rates

US 10Y yields rose 11bps to 4.26% while Canadian yields held steady at 3.40%, reflecting divergent policy expectations.

💳 Credit

TD Securities sees Canadian duration offering relative value while PIMCO favors quality over credit risk at current spread levels.

🛡️ Hedging

Credit markets remain historically tight with IG at 73bps, prompting institutions to emphasize up-in-quality positioning ahead of potential volatility.

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)January 28, 2026BoC expected to hold rates steady with growing hawkish tilt. Governor Macklem signals data dependency as inflation shows signs of persistence.
🇺🇸Federal Reserve3.75%Hold(December 18)January 28, 2026Fed likely to pause again with dot plot signaling fewer cuts. Powell emphasizing patience on inflation progress before additional easing.
🇪🇺ECB2.00%-25bps(December 12)March 5, 2026ECB cautious on further cuts as core inflation remains elevated. Lagarde emphasizing data-dependent approach with growth concerns persisting.
🇬🇧Bank of England0.25%Hold(December 19)February 5, 2026BoE maintaining ultra-accommodative stance despite inflation concerns. Bailey warning of potential policy adjustment if inflation expectations drift higher.

Market Snapshot

MetricCurrentWeekly ChangeStatus
🇨🇦 Canada 10Y3.4%0bps—
🇺🇸 US 10Y4.26%+11bps—
IG Spread (OAS)73bps—Tight
HY Spread (OAS)264bps—Tight

Rates Overview

🇨🇦 Canada

  • •Policy stance: BoC expected to hold at 2.25% on January 28—extended pause with hawkish tilt as inflation persistence concerns grow (TD Securities, Jan 24)
  • •Yield curve: 2s10s curve flattened to 84bps from 89bps; market pricing just 15bps of cuts through 2026
  • •Provincials: Ontario spreads tightened 2bps to +46bps over GoC; Quebec at +43bps remains rich vs fundamentals
  • •Institutional view: RBC Economics sees next BoC move likely higher but 'a long way off'—unemployment rate key factor
  • •Positioning: Favor 5Y GoC at 2.94%—offers compelling risk-adjusted returns vs duration extension (BMO Capital Markets)

🇺🇸 United States

  • •Fed stance: FOMC expected to hold at 3.75% January 28—dot plot revision likely shows fewer cuts in 2026 (Goldman Sachs, Jan 23)
  • •Inflation constraint: Core PCE stalling at 2.8% limits Fed flexibility; Powell emphasizing 'patience' on further easing
  • •Technicals: 10Y auction tail widened to 2.1bps this week—foreign demand waning as real yields compress
  • •Institutional view: JPMorgan targets 10Y Treasury range 4.00-4.50% with 'duration management key' for 2026
  • •Positioning: Neutral duration stance—favor 3-7Y sector over long end given inflation risk premium (Morgan Stanley)

🌍 Global

  • •Europe: Bunds underperformed with 10Y rising 8bps to 2.67%—ECB March meeting in focus for guidance
  • •UK: Gilt volatility elevated as BoE messaging turns more hawkish; 10Y up 12bps to 4.89%
  • •Japan: JGB 10Y stable at 1.15% as BoJ maintains ultra-loose policy despite yen weakness concerns
  • •EM flows: EPFR data shows $1.2B outflows from EM bonds as developed market real yields rise
  • •Positioning: Favor Canadian duration over US—better real yield dynamics and policy clarity (PIMCO)

Credit Markets

Investment Grade

  • •Spreads: IG OAS at 73bps—tightest since 2021 and 17th percentile vs 20-year history; limited compression upside
  • •Fundamentals: Leverage ratios stable at 2.8x but interest coverage declining to 8.1x from 9.2x year-ago (Moody's)
  • •Institutional view: BlackRock warns IG spreads 'priced for perfection'—prefers agency MBS over corporates
  • •Canada opportunity: Canadian IG trading 15bps wide to US equivalents—RBC sees 'structural undervaluation'
  • •Positioning: Underweight IG corporates at 25% vs 35% neutral—reallocate to government duration (Vanguard)

High Yield

  • •Spreads: HY OAS at 264bps prices 1.2% default rate vs Moody's 3.5% forecast—significant mispricing risk
  • •Quality rotation: BB-CCC spread widened to 196bps as investors flee lower quality; CCC issuance down 67% YoY
  • •Sectors: Energy HY outperformed with WTI above $75; retail and healthcare showing stress with 15% of names trading distressed
  • •Risk watch: Fitch warns of 'significant refinancing wall' in 2026-2027 with $450B HY maturities
  • •Positioning: Cap HY allocation at 10% focused on BB-rated—avoid CCC entirely given risk-reward imbalance (T. Rowe Price)

Hedging & Risk Management

Duration Strategy

  • •Stance: Neutral duration with tactical underweight long-end—inflation persistence key risk to duration strategies (Wellington Management)
  • •Target duration: Conservative portfolios 4.5 years vs 5.2 neutral; balanced 5.8 years—maintain flexibility for rate volatility
  • •Implementation: Barbell structure with 30% cash/short-term, 70% intermediate duration—avoid long-end vulnerability
  • •Risk trigger: 10Y Treasury above 4.50% would prompt duration extension; below 3.80% signals recession risk

Volatility & Hedging

  • •Vol environment: MOVE Index at 89 vs 85 long-term average—options relatively cheap for portfolio insurance
  • •Agency MBS: Passthrough spreads at +165bps over Treasuries offer 'significant value' vs IG corporates (DoubleLine)
  • •Income strategies: Covered call strategies on duration exposure generating 75-125bps additional income
  • •Protection: 4.50% strike puts on 10Y futures cost 28bps for 3-month protection—attractive asymmetric hedge
  • •Optionality: 1Y into 3Y payer swaptions at 4.25% strike attractive if Fed pivot accelerates

Institutional Perspectives

TD Securities

Constructive on Canadian duration with BoC easing cycle complete

Rates: Next BoC move likely higher but months away—2.25% rate 'appropriate' for extended period
Credit: Quality duration preferred over credit risk—spreads offer limited upside at current levels
Key Call: 5Y GoC target 2.70% by Q4 2026 as growth momentum builds

RBC Economics

Cautiously neutral with hawkish BoC tilt emerging

Rates: BoC hold through H1 2026 minimum—unemployment rate trajectory key for policy shift
Credit: Up-in-quality stance appropriate given spread compression and economic uncertainty
Key Call: Canadian dollar strength to 1.41 USD/CAD supports BoC hawkish pivot

PIMCO

Constructive on quality duration, cautious on credit beta

Rates: Medium-term duration attractive in Canada and Australia—diversification key
Credit: Agency MBS significantly undervalued vs IG corporates; prefer securitized assets
Key Call: 3-7Y US Treasuries target weighting 25-30% of fixed income allocation

BlackRock

Tactical underweight duration, overweight income-generating assets

Rates: Long duration vulnerable to inflation surprises—favor intermediate positioning
Credit: Agency MBS 'very cheap' vs corporates; securitized assets offer better risk-adjusted returns
Key Call: Target 4.0% fixed income returns over next decade through active allocation

Goldman Sachs

Neutral with emphasis on Fed dovish bias

Rates: Fed may cut twice in 2026 despite market skepticism—labor market key variable
Credit: High-quality securitized and EM debt offer income opportunities
Key Call: 10Y Treasury range 3.80-4.40% with bias toward lower end if growth slows

BMO Capital Markets

Modestly constructive on Canadian fixed income

Rates: BoC to maintain 2.25% through 2026—Fed cuts toward 3.25% support curve steepening
Credit: Investment-grade corporates preferred over high yield given spread dynamics
Key Call: Canadian fixed income returns 3.0-3.5% in 2026 vs 2.5% for US equivalents

Scotiabank Economics

Hawkish on BoC policy trajectory

Rates: BoC rate hikes likely H2 2026 as inflation persistence emerges—50bps increase to 2.75%
Credit: Corporate fundamentals supportive but spreads limit upside potential
Key Call: 5Y GoC to rise to 3.15% by year-end as policy expectations shift

JPMorgan Private Bank

Neutral with active management emphasis

Rates: Duration management critical—target 10Y Treasury 4.00-4.50% trading range
Credit: Income focus in high-quality credit; avoid duration risk in long corporates
Key Call: Diversified duration positioning across 2-7Y maturity spectrum optimal

Vanguard

Very constructive on high-quality fixed income

Rates: Fed limited by 3.5% neutral rate—bonds attractive for decade ahead at 4%+ yields
Credit: Quality bias essential—high-grade credit offers best risk-adjusted returns
Key Call: 40% fixed income allocation optimal with emphasis on government and agency securities

Morgan Stanley

Cautious on duration extension, selective on credit

Rates: Favor intermediate duration over long-end—inflation persistence key risk
Credit: Investment grade spreads near fair value; high yield appears expensive
Key Call: 3-7Y Treasury allocation 35% of fixed income vs 25% neutral weighting

CIBC Economics

Dovish hold—no BoC rate changes expected in 2026

Rates: Labor market slack provides non-inflationary growth runway before hikes needed
Credit: Neutral credit positioning given tight spreads but supportive fundamentals
Key Call: BoC hold at 2.25% through 2026 with risks balanced toward easing

National Bank Financial

Hawkish BoC expectations with rate hikes Q4 2026

Rates: 50bps of hikes by year-end with 5Y GoC rising to 3.0% by Q3 2027
Credit: Rate relief along yield curve will be modest given policy trajectory
Key Call: Canadian yield curve steepening as front-end rises faster than long-end

Portfolio Implications

🛡️

Conservative

  • •Target duration: 4.5 years—below neutral to manage rate volatility while capturing income
  • •GoC/Provincials 55%: Core allocation with focus on 3-7Y maturity sweet spot
  • •IG Corporates 25%: Quality bias toward A-rated and above; underweight vs neutral 35%
  • •Agency MBS 15%: Attractive spread pick-up over Treasuries with lower credit risk
  • •Cash 5%: Tactical reserve for deploying on weakness or volatility spikes
⚖️

Balanced

  • •Target duration: 5.8 years—neutral positioning with barbell structure implementation
  • •GoC/Provincials 45%: Blend of 2Y (20%) and 5-7Y (25%) for curve positioning
  • •IG Corporates 30%: Sector rotation toward financials and utilities; avoid energy concentration
  • •HY Corporates 15%: BB-rated focus with 10% allocation cap; avoid CCC entirely
  • •EM Debt 8%: Hard currency sovereign debt from IG-rated issuers only
  • •Cash 2%: Minimal cash drag while maintaining rebalancing flexibility
📈

Growth

  • •Target duration: 6.5 years—modest overweight duration for capital appreciation potential
  • •GoC/Provincials 35%: Reduced government weight to allow for spread product allocation
  • •IG Corporates 35%: Active sector rotation with BBB concentration up to 50% of IG allocation
  • •HY Corporates 20%: BB-heavy with selective CCC exposure capped at 3% of total portfolio
  • •EM Debt 8%: Mix of hard and local currency with focus on commodity-linked sovereigns
  • •Cash 2%: Minimal cash to maximize income generation and spread capture

Consensus vs Divergence

Where Markets Agree

  • +Central banks likely to maintain cautious stance with extended pause across major economies
  • +Credit spreads at historically tight levels warrant quality-over-yield positioning approach
  • +Intermediate duration (3-7Y) preferred over long-end given inflation uncertainty
  • +Agency MBS offers attractive spread pickup vs investment grade corporates at current levels

Points of Disagreement

  • ?BoC policy outlook: TD/RBC see extended hold vs Scotiabank/National Bank project H2 2026 hikes
  • ?Fed easing path: Goldman Sachs expects two cuts vs Morgan Stanley/BlackRock see prolonged pause
  • ?Duration positioning: PIMCO constructive on medium-term vs BlackRock underweight long duration
  • ?Credit allocation: Vanguard emphasizes quality focus vs BMO constructive on IG corporate spreads

Key Dates Ahead

DateEventRelevance
January 28Federal Reserve MeetingExpected hold but dot plot revision critical for 2026 outlook
January 28Bank of Canada MeetingPolicy statement tone shift toward hawkish bias possible
January 30Core PCE DataKey inflation metric for Fed policy trajectory assessment
February 5Bank of England MeetingBoE policy stance amid UK inflation persistence concerns
February 7Employment ReportLabor market strength key variable for central bank policy shifts

Sources & References