Given the deteriorating labour market conditions and rising unemployment in Canada, the current macroeconomic environment presents a compelling case for a more defensive portfolio posture. Depending on their investment goals, investors may consider increasing exposure to high-quality, duration-sensitive assets—such as federal-guaranteed securities and provincial bonds with favorable risk-adjusted yields—seeking to capitalize on potential rate cuts and mitigate spread volatility. Strategic positioning in these types of investment instruments may offer resilience amid economic headwinds and support long-term capital preservation.
Consider obtaining your fixed income exposure using a GCLP mutual fund or ETF
For investors looking to increase their fixed income portfolio’s duration exposure in the face of current economic conditions and potential further rate cuts, the Guardian Canadian Bond Fund (“GCBD”) may be a suitable option as it provides exposure to high-quality fixed income securities that aims for sustainable income and risk-conscious capital preservation. Depending on their investment goals, investors may also consider combining GCBD with the Guardian Short Duration Bond Fund (“GSDB”) which provides exposure to a diversified portfolio of short-term fixed income securities – to help balance interest rate sensitivity and credit spread exposure.
Let’s take a look at the current economic environment in Canada and the factors impacting the potential for a rate cut, which would have a direct impact on fixed income portfolios.
Macro View: In Canada, only a net 37,500 jobs have been added to the economy year-to-date, while the unemployment rate has reached cyclical highs and the labour force participation rate continues to decline steadily. This deterioration in labour market conditions reflects weakening economic momentum, with negative implications for consumer spending, housing demand, and overall GDP growth. These and other economic indicators suggest slack in the economy, which may prompt more accommodative monetary policy measures and weigh on investor sentiment in risk assets. Historically, similar conditions to the prevailing macroeconomic backdrop fostered a constructive environment for interest rates, supporting a duration extension.
Weakening labour market – Canada
Source: Guardian Capital LP using data from Bloomberg as of August 29, 2025 based on Statistics Canada Net Change in Labor Force Employment (ticker: CANLNETJ Index) and Statistics Canada Labor Force Unemployment Rate (ticker: CALXMER Index).
Fixed income returns are typically stronger during periods of economic weakness, as declining bond yields drive prices higher.
Average annualized monthly (lagged) bond returns when the unemployment rate is rising vs. falling:
Source: Guardian Capital LP using data from Bloomberg from December 31, 2005 to August 29, 2025. Bond returns based on the FTSE Canada Universe Bond Index (ticker: CBOBUTR Index) with a one-month lag. This index includes both government and corporate bonds.
Credit: With credit spreads at historically tight levels, the risk of maintaining or increasing exposure to mid- to long-term corporate bond exposure outweighs the potential reward. In the shorter-term, high quality corporate bonds should continue to offer value, as their credit spreads would need to widen more significantly than those of mid-term corporate bonds to result in a capital loss.
Credit spreads compressed to 2007 levels
Source: Guardian Capital LP using data from Bloomberg from October 31, 2002 to August 29, 2025 based on the Bloomberg Canada Aggregate Corporate Statistics Index (ticker: I00510CA Index).
OAS Spreads is a measure used to evaluate the yield of a bond after accounting for embedded options, such as the ability for the issuer to call (redeem early) or put (sell back) the bond.
Average annualized quarterly corporate bond returns when credit spreads widen
Source: Guardian Capital LP using data from Bloomberg from December 31, 2002 to June 30, 2025.1-5 Corp: Bloomberg Canada Aggregate Corporate 1-5 Year Index (ticker: I34227CA Index).
5-10 Corp: Bloomberg Canada Aggregate Corporate 5-10 Year Index (ticker: I34228CA Index).
Spread return is calculated as: Index Modified Duration multiplied by the Change in Index option-adjusted spread. Non-spread return is calculated as the average annualized quarterly return of the index total return minus the spread return.
Modified duration is a measure of a bond’s price sensitivity to interest rates. It estimates how much the price of a bond will change for a 1% change in yield, assuming no change in the bond’s cash flows.
Key highlights and the positioning of the Guardian Canadian Bond Fund (“GCBD”):
- GCBD continues to maintain a relative overweight in the mid-term segment of the yield curve through exposures Provincial government bonds in 7-year and 10-year maturities
- However, GCBD has been actively taking profits on these positions and reallocating into longer-tenor government bonds, such as Federal government bonds.
- The duration of GCBD is slightly longer than that of its benchmark, the FTSE Canada Universe Bond Index, though the contribution to duration from is comparatively lower
- GCBD’s corporate bond exposure is predominantly concentrated in shorter-term maturities
- Spread exposure is primarily concentrated in Provincial government bonds, however GCBD has been actively taking profits on some of these positions by minimizing the duration extension necessary in order to provide a similar yield in Canada guaranteed issues with lessor spread risk.
Canada’s weakening labour market supports a defensive shift toward high-quality, duration-sensitive bonds that are expected to benefit from lower yields and preserve capital.
For additional information on the Guardian Canadian Bond Fund or the Guardian Short Duration Bond Fund, please visit: www.guardiancapital.com/investmentsolutions
Disclaimer
This commentary is for informational purposes only and does not constitute investment, financial, legal, accounting, tax advice or a recommendation to buy, sell or hold a security. It shall under no circumstances be considered an offer or solicitation to deal in any product or security mentioned herein. It is only intended for the audience to whom it has been distributed and may not be reproduced or redistributed without the consent of Guardian Capital LP. This information is not intended for distribution into any jurisdiction where such distribution is restricted by law or regulation.
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