Week Ending February 8, 2026

Central Bank Pause Extends as Inflation Settles into Target Range

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Week Ending February 8, 2026

Central Bank Pause Extends as Inflation Settles into Target Range

Executive Summary

📊 Overview

Central bank policy stabilization drove modest bond rally this week with Canada 10Y declining 7bps to 3.40% and US 10Y falling 3bps to 4.29%.

📈 Rates

Bank of Canada maintains restrictive 2.25% rate as core inflation hovers near target, while Fed signals extended pause at 3.75%.

💳 Credit

Credit spreads remain historically tight with IG at 75bps, prompting quality emphasis among institutional investors.

🛡️ Hedging

TD Securities upgraded duration outlook to neutral from cautious as policy uncertainty diminishes.

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, 2026Extended pause likely as core inflation remains near 2.2% target. Labor market cooling supports current restrictive stance without further tightening.
🇺🇸Federal Reserve3.75%Hold(January 29)March 18, 2026Policy normalization continues with measured approach. Fed emphasizes data dependency as inflation shows sustained moderation toward 2% target.
🇪🇺ECB2.00%-25bps(January 23)March 19, 2026Accommodative easing cycle progressing gradually. Growth concerns balanced against persistent services inflation in eurozone periphery.
🇬🇧Bank of England0.25%-50bps(February 1)March 19, 2026Aggressive easing to combat economic weakness. Brexit-related structural challenges require sustained monetary accommodation.

Market Snapshot

MetricCurrentWeekly ChangeStatus
🇨🇦 Canada 10Y3.4%-7bps—
🇺🇸 US 10Y4.29%-3bps—
IG Spread (OAS)75bps—Tight
HY Spread (OAS)286bps—Tight

Rates Overview

🇨🇦 Canada

  • •Policy stance: BoC maintained 2.25% rate with extended restrictive stance as core inflation holds at 2.2% (BoC Summary, January 22)
  • •Yield curve: Modestly inverted at -15bps (2s10s) from -22bps last week; market prices 75bps cumulative cuts through 2026
  • •Provincials: Ontario tightened 2bps to +46bps while Quebec steady at +45bps; foreign demand supporting technicals
  • •Institutional view: TD Economics sees neutral stance warranted—'policy uncertainty has peaked with inflation near target' (TD Weekly, February 4)
  • •Positioning: Extend to 4.5-5.0Y duration from 4.0-4.5Y as BoC policy stabilizes; favor 5Y Ontario at 3.48% vs fair value 3.35%

🇺🇸 United States

  • •Fed stance: FOMC maintained 3.75% with data-dependent approach as PCE core moderates to 2.1% (FOMC Statement, January 29)
  • •Inflation progress: Core services excluding housing declined 0.1% MoM supporting Fed dovish tilt without immediate easing
  • •Technicals: Treasury auction demand robust with 10Y bid-cover at 2.7x vs 2.4x average; foreign central bank buying resumed
  • •Institutional view: Goldman Sachs expects 'extended pause through Q3 2026 with gradual normalization thereafter' (GS Research, February 3)
  • •Positioning: Neutral duration bias with preference for 7-10Y sector offering steepening protection

🌍 Global

  • •Europe: Bund rally continued with 10Y at 1.95% as ECB dovish guidance supports duration; periphery outperformed with Italy -5bps
  • •UK: Gilts volatile post-BoE surprise 50bp cut to 0.25%; 10Y at 3.15% reflects growth concerns trumping inflation risks
  • •Japan: JGB range-bound with 10Y at 0.95% as BoJ maintains ultra-loose policy; yield curve control anchors long-end
  • •EM flows: $1.2B inflows to EM debt funds as global rate volatility subsides; Mexico and Brazil outperformed on carry
  • •Positioning: Overweight Bunds vs Treasuries on ECB dovish cycle; underweight UK given fiscal uncertainty

Credit Markets

Investment Grade

  • •Spreads: IG tightened 1bp to 75bps OAS—tightest since March 2021 with fundamentals supporting but valuations stretched
  • •Fundamentals: Net leverage stable at 2.8x while interest coverage declined to 8.2x from 8.6x; $47B monthly inflows continue
  • •Institutional view: PIMCO warns 'spread levels offer inadequate compensation for refinancing risks ahead' (PIMCO Outlook, February 5)
  • •Canada opportunity: Canadian banks trade +62bps vs US peers at +78bps despite superior Tier 1 ratios and regulatory framework
  • •Positioning: Quality rotation to A-AA from BBB as 38% of BBB segment faces refinancing in 2026-2027 into higher rate environment

High Yield

  • •Spreads: HY tightened 6bps to 286bps pricing 2.1% default rate vs Moody's 2.8% forecast for 2026
  • •Quality migration: BB outperformed CCC by 85bps YTD as investors prioritize balance sheet strength over yield
  • •Sectors: Energy +125bps, Healthcare +165bps while Retail stressed at +485bps reflecting consumer spending normalization
  • •Risk watch: BlackRock highlights 'CCC segment vulnerable with 15% facing liquidity stress by year-end' (BlackRock Credit, February 6)
  • •Positioning: Cap HY allocation at 15% maximum with BB-only bias; avoid retail and leveraged consumer discretionary

Hedging & Risk Management

Duration Strategy

  • •Stance: Upgrade to neutral duration from previous cautious as central bank policy uncertainty moderates (RBC GAM, February 5)
  • •Target duration: Extend to 4.5-5.0Y from 4.0-4.5Y for balanced mandates; conservative accounts maintain 3.5-4.0Y
  • •Implementation: Barbell approach with 2Y/10Y emphasis to capture curve steepening if growth slows
  • •Risk trigger: Reduce duration if Canada 10Y breaks above 3.60% or core inflation reaccelerates above 2.5%

Volatility & Hedging

  • •Vol environment: MOVE Index at 89 vs 95 historical average—volatility moderating as policy uncertainty recedes
  • •Agency MBS: Current coupon 30Y at 5.25% offers 85bps pickup vs Treasuries with limited prepayment risk in higher rate environment
  • •Income strategies: Covered call strategies on IG corporate ETFs generating additional 150-200bps income in range-bound markets
  • •Protection: 3Y/10Y steepening trades cost 8bps for 25bp protection—attractive asymmetric hedge if growth disappoints
  • •Optionality: 1Y x 2Y CAD receiver swaptions at 45bps offer BoC easing protection with limited time decay

Institutional Perspectives

TD Securities

Upgraded to neutral duration stance from cautious

Rates: Canada 10Y fair value 3.35% with BoC policy stabilization reducing uncertainty
Credit: Quality rotation essential with A-AA focus as BBB refinancing wall approaches
Key Call: Extend duration to 4.5-5.0Y target as central bank policy uncertainty peaks

RBC Economics

Constructive on government bonds as growth concerns emerge

Rates: BoC extended pause supports intermediate duration positioning
Credit: Canadian bank credit attractive at +62bps vs fundamentals
Key Call: Provincial credit undervalued—Ontario 5Y target spread +40bps

PIMCO

Cautious on credit despite continued inflows

Rates: Government duration preferred over credit spread tightening
Credit: IG spreads at 75bps inadequate for refinancing risks
Key Call: Quality-only credit approach—avoid BBB segment facing refinancing pressures

Goldman Sachs Research

Extended pause scenario across major central banks

Rates: Fed maintains 3.75% through Q3 2026 with gradual normalization
Credit: Late-cycle credit dynamics emerging requiring defensive positioning
Key Call: Neutral duration with steepening bias—favor 7-10Y Treasury sector

BMO Capital Markets

Balanced duration approach as policy uncertainty moderates

Rates: Target 4.5-5.0Y duration for balanced mandates
Credit: Provincial infrastructure spending supports credit fundamentals
Key Call: Overweight provincials vs corporates—better risk-adjusted value

BlackRock Investment Institute

Quality emphasis with selective credit risk

Rates: Underweight long duration but maintain intermediate exposure
Credit: CCC segment vulnerable with 15% facing liquidity stress
Key Call: A-AA corporate focus with maximum 15% HY allocation

Scotiabank Economics

BoC credibility supports CAD fixed income positioning

Rates: Restrictive policy stance appropriate given inflation trajectory
Credit: Canadian credit quality advantage vs global peers
Key Call: CAD duration preferred over USD given BoC inflation credibility

Wellington Management

Security selection critical as dispersion increases

Rates: Tactical duration positioning around central bank meetings
Credit: Balance sheet quality paramount in credit selection
Key Call: Focus on refinancing capacity—avoid 2026-2027 maturity wall exposure

CIBC Economics

Labor market cooling supports current policy stance

Rates: Unemployment at 6.1% reduces BoC easing urgency
Credit: Canadian bank regulation provides defensive characteristics
Key Call: Financial sector overweight given regulatory capital buffer advantage

DoubleLine

Government bonds preferred over corporate credit

Rates: Treasury duration attractive as credit fundamentals peak
Credit: Corporate leverage elevated with refinancing wall approaching
Key Call: Reduce credit allocation to 25% from 35%—emphasize government duration

Morgan Stanley Research

Tactical opportunities emerging in quality credit

Rates: Intermediate duration sweet spot with curve steepening potential
Credit: Late-cycle positioning requires quality bias
Key Call: 5-7Y government duration preferred—avoid credit curve extension

Loomis Sayles

Structured credit offers better risk-adjusted returns

Rates: Government foundation with structured yield enhancement
Credit: Agency MBS and ABS preferred over corporate credit
Key Call: Current coupon MBS at 5.25% offers superior risk-adjusted value

Portfolio Implications

🛡️

Conservative

  • •Target duration: 3.5-4.0 years — defensive positioning with BoC policy stabilizing
  • •GoC/Provincials 70%: Core allocation with emphasis on 2-7Y sector for stability
  • •IG Corporates 25%: A-AA quality focus avoiding BBB refinancing risks
  • •Agency MBS 3%: Current coupon 30Y at 5.25% for yield enhancement
  • •Cash 2%: Tactical reserve for rebalancing opportunities
⚖️

Balanced

  • •Target duration: 4.5-5.0 years — neutral stance upgraded from previous caution
  • •GoC/Provincials 55%: Intermediate focus with provincial overweight for pickup
  • •IG Corporates 30%: Quality rotation to A-AA from BBB given refinancing concerns
  • •HY Corporates 10%: BB-only approach capping allocation amid tight spreads
  • •EM Debt 3%: Hard currency focus on Mexico/Brazil for carry enhancement
  • •Cash 2%: Dry powder for spread widening opportunities
📈

Growth

  • •Target duration: 5.0-5.5 years — extended positioning as policy uncertainty moderates
  • •GoC/Provincials 45%: Reduced weight with tactical curve positioning
  • •IG Corporates 35%: Active sector rotation with A-AA quality emphasis
  • •HY Corporates 15%: Maximum allocation with BB-only constraint for risk management
  • •EM Debt 3%: Selective hard currency exposure in higher-yielding credits
  • •Cash 2%: Strategic reserve for volatility-driven rebalancing

Consensus vs Divergence

Where Markets Agree

  • +Central bank policy pause extends through Q2 2026 as inflation moderates toward targets
  • +Credit spreads historically tight requiring quality bias and reduced allocation
  • +Duration stance upgrades to neutral from cautious as policy uncertainty peaks
  • +BBB corporate segment vulnerable given refinancing into higher rate environment

Points of Disagreement

  • ?DoubleLine advocates government-only vs PIMCO maintaining selective credit exposure
  • ?RBC Economics bullish on provincials vs Goldman Sachs preferring Treasuries
  • ?TD Securities extending duration vs BlackRock maintaining underweight long-end
  • ?Wellington emphasizing security selection vs BMO favoring sector allocation approach

Key Dates Ahead

DateEventRelevance
February 12US CPI ReleaseCore CPI forecast 0.2% MoM—key Fed policy input
February 18Canadian CPI ReleaseCore inflation near 2.2%—BoC extended pause justification
March 18BoC Policy DecisionRate hold expected with updated economic projections
March 18FOMC MeetingFed policy pause continuation with updated dot plot
March 19ECB Policy MeetingPotential 25bp cut as eurozone growth concerns persist

Sources & References