Fixed Income
A softer inflation report this week made it much less likely the Fed will raise interest rates in September, and Canada's central bank is comfortably staying put for now. Bond markets were calm, though some big investment firms are getting choosier about lower-quality bonds.
Issue 31Week ending August 16, 20263,753 words17 min read9 sources
Week Ending August 16, 2026
Canada's 10Y edged up 1bp to 3.62% while the US 10Y fell 6bps to 4.63% as softer July CPI pared Fed hike pricing from 27bps to just 10bps for September; the BoC sits comfortably on hold with a newly flagged 2027 hike risk.
IG (79bps) and HY (271bps) spreads remain historically tight, with BlackRock moving to a strategic underweight on high yield even as most managers still favor quality carry over further compression.
Institutions are split on duration: Scotiabank argues markets over-priced Fed hikes and favors receiving, while BlackRock and J.P. Morgan lean cautious on long-end duration given a structurally higher term premium. Favor front-end and belly carry over long-duration exposure until the September cluster of five central bank meetings clarifies the path.
Fixed income markets spent the week unwinding hawkish Fed repricing after a benign July CPI report pulled September hike pricing down to just 10bps from a late-July peak of 27bps, per Scotiabank Economics. The US 10Y fell 6bps to 4.63% while Canada's 10Y ticked up 1bp to 3.62%, with the BoC now "more comfortably on hold" according to RBC Economics, which also flagged modest BoC and ECB hike risk into 2027 as slack is absorbed faster than expected. Credit spreads held at historically tight levels (79bps IG, 271bps HY), prompting BlackRock Investment Institute to move to a strategic underweight on high yield and developed-market government bonds alike, citing a structurally higher cost of capital.
Driving the week
QMR MARKET BRIEF
Week ending
Duration Cautious · Credit Cautious · Quality bias Positive · Policy uncertainty High
Snapshot retrieved Aug 15, 2026, 6:30 a.m. EDT · source dates vary
| Bank | Rate % | Last move | Next decision | Outlook |
|---|---|---|---|---|
| BoCBank of Canada | 2.25 | HoldJuly 15 | September 2, 2026 | RBC Economics describes the BoC as "more comfortably on hold" amid a firming economy and soft core inflation, with modest adjustment hikes now flagged for 2027 if trends persist. |
| FedFederal Reserve | 3.75 | HoldJuly 29 | September 16, 2026 | The Fed held with three regional presidents dissenting in favor of a hike; softer July CPI has pared September hike pricing to just 10bps, but Chair Warsh's communication has raised credibility concerns. |
| ECBEuropean Central Bank | 2.25 | HoldJuly 23 | September 10, 2026 | RBC Economics continues to call for one more ECB hike in September given lingering energy-market uncertainty, with risk tilted toward delivering even more. |
| BoEBank of England | 3.75 | HoldJuly 30 | September 17, 2026 | The MPC held 6-3; Governor Bailey pushed back on market chatter that the BoE is edging toward a hike despite second-round energy price effects, and RBC expects the Bank Rate held through 2027. |
| BoJBank of Japan | 1.00 | HoldJuly 31 | September 18, 2026 | The BoJ remains on a gradualist normalization path, with the next move contingent on the durability of wage growth and services inflation into the autumn Shunto-adjacent data cycle. |
Constructive-to-neutral on Canada, newly flagging two-sided rate risk RBC continues to see Canada's tariff exposure as narrow rather than broad-based, limiting the growth hit even if the August 19 deadline passes without resolution.
Neutral on Fed policy, watching hawkish dissent closely BMO's Sal Guatieri notes that unit labour costs remain contained at 1.4% y/y, well below the 6.2% peak seen in 2021, supporting the disinflation base case.
Constructive on duration, sees Fed hike pricing as overdone Derek Holt frames Fed Chair Warsh's approach to forward guidance as itself a source of added rate volatility, echoing concerns raised elsewhere about central bank communication.
Cautious on Canadian growth optics beneath the headline data TD notes that a shrinking population base is now the dominant swing factor in headline GDP readings, complicating comparisons with prior cycles.
Cautious on duration and high yield alike, favoring equities and private credit BlackRock frames both trends as consistent with structural change rather than contradiction, underpinning its capital market assumptions across multiple macro scenarios.
Neutral, sees Fed hikes as unlikely but non-trivial Goldman's Mericle also points to category-level PCE data showing a smaller-than-feared tariff impact on goods prices.
Cautious on long-duration Treasuries, constructive on the front end The firm continues to argue that a traditional stock-bond mix needs to be complemented given persistent inflation and increased rate volatility.
Constructive on global duration and high-quality diversification PIMCO frames today's starting yields, high relative to the post-2008 era, as offering a multi-year window for locking in income before any durable shift lower in rates.
A softer inflation report this week made it much less likely the Fed will raise interest rates in September, and Canada's central bank is comfortably staying put for now. Bond markets were calm, though some big investment firms are getting choosier about lower-quality bonds.
Should I be worried about my bond fund?
No, nothing dramatic happened this week, rates were mostly steady and this counts as a calm week.
Does this mean interest rates are coming down soon?
It means a rate hike is now very unlikely in September, but it doesn't mean cuts are guaranteed either, we're still watching the data.
Are riskier bonds still a good idea?
Some major investors are pulling back a bit from lower-quality bonds because they're not paying much extra for the added risk right now.
Bottom lineThis was a quiet, reassuring week: inflation came in softer, and both the Fed and Bank of Canada look on hold for now. The conversation worth having is whether portfolios are leaning too much on lower-quality or long-term bonds, since several major investors are favoring safer, shorter-term holdings until September's central bank meetings bring more clarity.
| Date | Event | Relevance |
|---|---|---|
| August 19 | U.S. Section 338 tariff deadline | Targets ~5% of Canadian exports; RBC estimates a 0.4% hit to GDP and jobs if implemented |
| September 2, 2026 | Bank of Canada rate decision | Widely expected hold at 2.25%; watch for 2027 hike-risk language |
| September 10, 2026 | ECB rate decision | RBC calls for one more 25bps hike given energy-market uncertainty |
| September 16, 2026 | FOMC rate decision | Market pricing just 10bps of hike risk after softer July CPI |
| September 17, 2026 | Bank of England rate decision | Expected hold at 3.75% despite energy-driven inflation chatter |
| September 18, 2026 | Bank of Japan rate decision | Gradual normalization path continues; watch wage and services-inflation data |
| Early September | US August CPI and employment report | Key input for confirming whether core inflation continues cooling toward BMO's ~2% by-next-summer path |