Week Ending February 12, 2026

Central Banks Pivot Hawkish as Inflation Proves Stickier Than Expected

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Week Ending February 12, 2026

Central Banks Pivot Hawkish as Inflation Proves Stickier Than Expected

Executive Summary

📊 Overview

Central banks delivered a hawkish reality check this week as inflation proves stickier than consensus expected, forcing duration defensiveness and quality emphasis.

📈 Rates

The BoC's shift toward extended restrictive policy lifted Canada 10Y yields 4bps to 3.47%, while Fed officials pushed back on aggressive easing bets with core PCE stuck at 2.8%.

💳 Credit

Credit spreads held near cycle tights at 76bps for IG despite deteriorating fundamentals, prompting quality rotation as $950B corporate refinancing wall looms.

🛡️ Hedging

TD Securities advocates reducing duration exposure while RBC emphasizes Canadian financial sector strength amid global policy uncertainty.

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

Cautious

Credit

Cautious

Quality Bias

Positive

Policy Uncertainty

Elevated

Central Bank Watch

Central BankRateLast ActionNext MeetingOutlook
🇨🇦Bank of Canada2.25%Hold(December 11)March 18, 2026BoC shifts hawkish on persistent core inflation running 0.3pp above target. Macklem signals extended pause with data dependency elevated as housing costs remain stubborn.
🇺🇸Federal Reserve3.75%Hold(January 29)March 18, 2026Fed pauses easing cycle as core PCE holds at 2.8%. Powell emphasizes patience with restrictive policy needed longer to anchor expectations amid resilient services inflation.
🇪🇺ECB2.00%Hold(February 5)March 12, 2026ECB extends pause as eurozone core inflation reaccelerates to 2.7%. Lagarde signals measured approach but warns accommodation era has ended given wage pressures.
🇬🇧Bank of England0.25%Hold(February 5)March 19, 2026BoE maintains ultra-loose stance despite services inflation at 5.1%. Bailey balances growth concerns against persistent price pressures in domestic economy.

Market Snapshot

MetricCurrentWeekly ChangeStatus
🇨🇦 Canada 10Y3.47%+4bps—
🇺🇸 US 10Y4.32%+4bps—
IG Spread (OAS)76bps—Tight
HY Spread (OAS)292bps—Tight

Rates Overview

🇨🇦 Canada

  • •Policy stance: BoC signals extended pause at 2.25% as core inflation runs 0.3pp above target — Macklem warns accommodation premature (BoC Quarterly Review, Feb 10)
  • •Yield curve: Canada 10Y rises 4bps to 3.47% testing key 3.75% resistance level; curve inversion persists at -89bps (2s10s)
  • •Provincials: Ontario spreads widen 2bps to +50bps as supply calendar heavy with $45B Q1 issuance; Quebec holds tight at +45bps
  • •Institutional view: TD Economics cuts rate cut expectations to 25bps by year-end from 75bps previously — 'sticky services inflation changes the game'
  • •Positioning: Underweight duration targeting 4.0Y from 5.0Y previously; overweight 5Y Provincials at +48bps offering value vs corporates

🇺🇸 United States

  • •Fed stance: Powell pushes back on aggressive easing with core PCE at 2.8% — 'patience required' to anchor inflation expectations (FOMC Minutes, Feb 11)
  • •Inflation constraint: Services inflation resilient at 4.2% driven by housing costs; wage growth remains elevated at 4.8% y/y constraining Fed flexibility
  • •Technicals: Treasury supply concerns mount with $2.1T gross issuance planned for 2026; foreign demand softens as policy rates stay elevated globally
  • •Institutional view: Goldman Sachs removes Q2 rate cut expectations — 'Fed on hold until inflation shows sustained decline below 2.5%'
  • •Positioning: Underweight long duration; favor 3-7Y belly positioning as curve bear steepens with front-end anchored by hawkish Fed

🌍 Global

  • •Europe: Bund yields rise 6bps to 2.31% as ECB turns hawkish on wage pressures; core inflation reaccelerates to 2.7% forcing policy recalibration
  • •UK: Gilts underperform with 10Y at 4.15% (+8bps) as services inflation hits 5.1%; BoE balances growth concerns against persistent price pressures
  • •Japan: JGB 10Y stable at 1.02% as BoJ maintains ultra-loose policy despite wage spring negotiations pointing to 3.5% increases
  • •EM flows: Emerging market bonds face $2.8B outflows as DM central bank hawkishness reduces EM appeal; LatAm credit spreads widen 15bps
  • •Positioning: Underweight global duration; overweight Japan on BoJ accommodation persistence while avoiding EM given dollar strength

Credit Markets

Investment Grade

  • •Spreads: Investment grade OAS widens 2bps to 76bps — still 25bps below long-term average but fundamentals deteriorating with leverage at 3.1x
  • •Fundamentals: Interest coverage ratios decline to 8.2x from 9.1x as refinancing costs bite; fund outflows total $1.2B as quality concerns mount
  • •Institutional view: PIMCO warns 'late-cycle credit dynamics emerging' with BBB migration risk as 42% of IG universe faces refinancing by 2027
  • •Canada opportunity: Canadian banks trade 15bps wide to US peers despite superior capital ratios — RBC GAM sees 'compelling relative value'
  • •Positioning: Rotate to AA/A quality targeting 65% allocation vs 45% previously; underweight BBB to 20% given refinancing wall risks

High Yield

  • •Spreads: High yield OAS widens 7bps to 292bps as default rate forecasts rise to 4.2% by year-end from 3.1% currently
  • •Quality rotation: BB spreads outperform CCC by 12bps this week as investors flee lowest-quality credits; CCC default rate could hit 12%
  • •Sectors: Energy credits underperform with spreads +25bps wider on oil price volatility; healthcare benefits from defensive characteristics
  • •Risk watch: Moody's places 47 HY issuers on review for downgrade citing margin pressure and refinancing concerns — up from 31 last month
  • •Positioning: BB-only strategy with 15% HY allocation cap; avoid energy and retail sectors given fundamental deterioration

Hedging & Risk Management

Duration Strategy

  • •Stance: Reduce duration to 4.0-4.5Y from 5.0-5.5Y as central bank hawkish pivot extends higher-for-longer scenario (BMO Capital Markets)
  • •Target duration: Conservative mandates 4.0Y, balanced 4.5Y, growth-oriented 4.0Y — all reduced from previous week's targets
  • •Implementation: Barbell strategy selling 10Y+ exposure while adding 2-3Y to benefit from eventual easing cycle when it materializes
  • •Risk trigger: Canada 10Y break above 3.75% would signal further duration reduction to 3.5Y as policy normalization expectations reset

Volatility & Hedging

  • •Vol environment: MOVE Index surges to 118 from 103 as rate volatility increases — well above 95 long-term average signaling opportunity
  • •Agency MBS: Mortgages offer 45bps pickup to Treasuries with convexity risk manageable given Fed balance sheet runoff slowing
  • •Income strategies: Covered call strategies on bond ETFs generate 180bps additional yield in elevated volatility environment
  • •Protection: Receiver swaptions at 4.25% strike offer asymmetric protection if central banks forced to ease aggressively on growth concerns
  • •Optionality: Cross-currency basis swaps favor CAD funding given BoC credibility premium — 3-month CAD-USD basis at -12bps

Institutional Perspectives

TD Securities

Cautious on duration given central bank hawkish recalibration

Rates: Canada 10Y target revised to 3.75% from 3.15% — BoC extended pause changes trajectory
Credit: Quality-only approach as BBB refinancing wall meets higher rates
Key Call: Reduce portfolio duration to 4.0Y targeting defensive positioning through policy uncertainty

RBC Economics

Defensive positioning warranted as inflation persistence forces policy reassessment

Rates: BoC credibility premium supports CAD — policy rate floor likely 2.00% vs 1.50% previously expected
Credit: Canadian banks offer relative value at +65bps vs US peers despite superior fundamentals
Key Call: Overweight Canadian financials expecting 10bps spread compression over 6 months

PIMCO

Late-cycle credit dynamics emerging requiring defensive positioning

Rates: Government bonds preferred as credit spreads inadequate for refinancing risks
Credit: BBB corporate migration risk elevated with 42% of IG facing refinancing into higher rate environment
Key Call: Reduce credit exposure to 25% from 40% emphasizing AA/A quality bias

Goldman Sachs Research

Policy rates staying higher for longer as inflation proves persistent

Rates: Fed terminal rate estimate raised to 3.50% from 2.50% with no cuts until Q4 2026
Credit: IG spreads vulnerable to 120bps widening but technicals provide floor near 90bps
Key Call: Remove Q2 Fed rate cut expectation — 'patience required for sustainable disinflation'

BMO Capital Markets

Higher-for-longer scenario requires duration defensiveness

Rates: Target duration reduction to 4.0-4.5Y from 5.0-5.5Y given policy pivot
Credit: Provincial credit attractive with infrastructure spending supporting fundamentals despite higher rates
Key Call: Barbell strategy: sell 10Y+ duration, add 2-3Y positioning for eventual cycle turn

BlackRock Investment Institute

Quality emphasis essential as late-cycle risks crystallize

Rates: Underweight government duration but maintain quality bias in credit allocation
Credit: AA-A corporate focus as BBB fundamentals deteriorate with higher refinancing costs
Key Call: Increase quality allocation to 65% from 45% with focus on balance sheet strength

Scotiabank Economics

BoC hawkish tilt reflects inflation management credibility

Rates: Extended restrictive policy needed to anchor expectations — cuts delayed to H2 2026
Credit: Canadian credit quality advantage evident as global refinancing pressures mount
Key Call: Policy rate floor at 2.00% vs previous 1.50% target given inflation persistence

Wellington Management

Security selection critical as credit dispersion increases

Rates: Duration risk elevated requiring tactical underweight positioning
Credit: Balance sheet quality paramount with refinancing capacity key selection criteria
Key Call: Focus on issuers with refinancing completed or minimal near-term maturities

CIBC Economics

Labor market strength complicates central bank easing timeline

Rates: Unemployment needs to reach 7.5% to trigger BoC accommodation resumption
Credit: Corporate margins under pressure but Canadian banks insulated by regulatory framework
Key Call: Extended pause likely through Q3 2026 given persistent wage-price dynamics

DoubleLine

Credit fundamentals peaking requiring government bond emphasis

Rates: Treasury duration preferred despite higher-for-longer given credit risk concerns
Credit: Corporate fundamentals vulnerable with leverage elevated and refinancing wall approaching
Key Call: Increase government allocation to 60% from 45% reducing credit risk exposure

Morgan Stanley Research

Policy divergence creates tactical opportunities despite hawkish tilt

Rates: Favor intermediate duration in quality markets avoiding peripheral risk
Credit: Late-cycle positioning requires quality bias as earnings growth peaks
Key Call: Overweight Canadian credit given policy credibility and banking sector strength

Loomis Sayles

Structured credit offers better risk-adjusted returns than corporates

Rates: Government foundation with structured products for yield enhancement in higher rate environment
Credit: Agency MBS and ABS preferred over corporate given spread compression and refinancing risks
Key Call: Target 25% structured credit allocation capturing 45bps yield pickup with lower credit risk

Portfolio Implications

🛡️

Conservative

  • •Target duration: 4.0 years — reduced from 4.5Y given central bank hawkish pivot and higher-for-longer scenario
  • •GoC/Provincials 70%: Core anchor increased given credit concerns and refinancing wall approaching corporate sector
  • •IG Corporates 25%: Quality focus with AA-A emphasis; reduced from 30% given late-cycle risks and margin pressure
  • •Agency MBS 5%: Modest allocation for yield enhancement capturing 45bps pickup with manageable convexity risk
  • •Cash 0%: No tactical reserve needed with quality fixed income offering attractive yields at current levels
⚖️

Balanced

  • •Target duration: 4.5 years — defensive positioning from previous 5.0Y reflecting policy uncertainty and inflation persistence
  • •GoC/Provincials 55%: Stable core with provincial emphasis given infrastructure spending supporting credit profiles
  • •IG Corporates 30%: Quality rotation to AA-A credits comprising 65% of allocation; underweight BBB refinancing risks
  • •HY Corporates 10%: BB-only strategy avoiding CCC given default rate rising to 4.2%; focus on healthcare defensives
  • •EM Debt 5%: Minimal allocation given DM central bank hawkishness reducing EM appeal and dollar strength headwinds
  • •Cash 0%: Fully invested given attractive yield levels across quality spectrum despite late-cycle concerns
📈

Growth

  • •Target duration: 4.0 years — significant reduction from 5.5Y reflecting higher policy rate expectations and duration risk
  • •GoC/Provincials 40%: Reduced anchor weight but maintain quality foundation for portfolio stability
  • •IG Corporates 35%: Active quality rotation emphasizing refinancing capacity and balance sheet strength over yield
  • •HY Corporates 15%: BB-only with healthcare and utilities focus; avoid energy and retail given fundamental deterioration
  • •EM Debt 10%: Selective allocation to investment grade EM avoiding local currency given dollar strength cycle
  • •Cash 0%: Opportunity cost minimal with short-term rates elevated; maintain full investment in quality credits

Consensus vs Divergence

Where Markets Agree

  • +Central banks maintaining restrictive policy longer than previously expected given inflation persistence
  • +Duration risk elevated requiring defensive positioning with target reductions across mandates
  • +Credit quality rotation essential as late-cycle dynamics emerge with refinancing wall approaching
  • +Policy rates likely staying above neutral longer creating headwinds for rate-sensitive sectors

Points of Disagreement

  • ?Rate cut timing: TD sees 25bps by year-end vs Goldman expecting no cuts until Q4 2026
  • ?Credit allocation: PIMCO reduces to 25% vs Loomis Sayles emphasizing structured credit at 25% allocation
  • ?Duration targets: BMO advocates 4.0-4.5Y vs DoubleLine preferring government-heavy approach at longer duration
  • ?Policy terminal rates: RBC estimates BoC floor 2.00% vs CIBC seeing potential for 1.75% if unemployment rises

Key Dates Ahead

DateEventRelevance
February 17Canada Inflation Data (January)Key input for BoC March decision timeline
February 25Fed Chair Powell Senate TestimonyPolicy guidance amid inflation persistence
March 12ECB Policy MeetingEuropean central bank response to reacceleration
March 18BoC & Fed Policy DecisionsSynchronized meetings test policy divergence
March 19Bank of England DecisionUK policy balance between growth and inflation

Sources & References