Canadian bond yields pulling away from US as local factors take over, FTSE Russell finds
On the credit side, the correlation between Canadian and US investment-grade spreads may be overstated by autocorrelation within the two data series, the report found.
When measured by first differences rather than spread levels, the correlation drops sharply, suggesting local factors, including the Bank of Canada’s policy responses and differing sector composition, play a larger role than previously assumed. Financial issues, which carry close to a 40% weight in the Canadian investment-grade market, showed strong negative correlation to the yield curve and tend to move first following macro shocks.
Credit spreads hold steady despite issuance surge
US investment-grade credit spreads have remained largely stable even as longer-dated issuance climbs, driven by hyperscalers, utilities and infrastructure borrowers shifting away from funding capital expenditure through cash flow and equity toward bond markets instead. Debt issuance by these companies averaged just 28 billion dollars annually between 2020 and 2024, before jumping to 121 billion dollars in 2025, with 2026 issuance expected to climb further still. Despite this shift, the report found no meaningful steepening of the US credit curve as a result.
An earlier anomaly in agency mortgage-backed securities, where spreads had exceeded investment-grade levels, has also unwound, even as uncertainty lingers over the pace at which the Fed will offload its MBS holdings.
FX and performance
The US dollar strengthened further in the second quarter on the back of the Fed’s hawkish stance, pushing most G7 currencies lower. The Japanese yen bore the brunt of the move, falling to its weakest level against the dollar since 1986 despite higher Japanese government bond yields and narrower rate differentials between the two countries.
