Here’s how tariffs are impacting bond markets

Long-term conventional and real return U.S. Treasuries gained about 5% in the month in Canadian dollar terms.

“Unsettled investors” are turning to U.S. Treasuries, which are “benefiting from that mini flight to quality on weaker economic data,” Soubeyran said.

Meanwhile, short-term Japanese government bonds and U.K. gilts gained about 1-2%, “thanks to the yen rally and sterling recovery,” she noted.

Canadian conventional and real return bonds delivered modest returns in February, with long-term Canadian government bonds posting the highest returns at 2.5%.

U.S. Treasuries performed well over a longer time horizon too. Since the start of the year, long-term U.S. Treasuries posted returns north of 6%. Meanwhile, short-term U.S. Treasuries posted a nearly 12% return over the last 12 months.

Soubeyran attributed these gains to “the combination of [U.S. Federal Reserve] policy easing, risk aversion that we’ve seen more recently, but especially the 6 or 7% appreciation of the U.S. dollar versus the Canadian dollar over the 12 months.”

Similarly, the performance of Japanese government bonds and U.K. gilts significantly improved over the past 12 months due to the countries’ respective currency improvements against the Canadian dollar.

There were also “very impressive returns” from Canadian government and real return bonds, Soubeyran noted, as a result of the Bank of Canada (BoC) nearly halving its key interest rate over the past year. Long-term Canadian real return bonds gained 11.2% on a year-over-year basis.

Corporate bonds also posted strong returns across all markets over the past 12 months and held up well in February with modest positive returns, the FTSE Russell researchers noted.

Over the 12-month period, Canadian investment-grade and high-yield bonds posted 9.5% and 11% returns over the 12-month period, respectively. By comparison, U.S. investment-grade bonds gained 13.3%, while U.S. high-yield bonds delivered a 17.1% return.

And in February, Canadian investment-grade and high-yield bonds posted returns of 0.8% and 0.7%, respectively, while U.S. investment-grade bonds saw returns of 1.6% and U.S. high-yield bonds remained flat.

Notably, Canadian and U.S. investment-grade and high-yield credit spreads tightened significantly over the past decade, which Soubeyran said suggests “restored confidence in the creditworthiness of companies and low defaults.”

“We see that markets seem to have shrugged off the potential risks to corporate balance sheets with these really tight spreads,” she added.

“So, it really raises a question about the market resilience: Are investors correctly gauging the risk, or are they taking on more credit exposure than the current economic climate justifies?”

And while Canadian corporate bond yields declined in 2024 compared to their U.S. and U.K. equivalents, they still provide yield levels of 4–6% in absolute returns, Soubeyran noted.

Among investment-grade bonds, A-, AA-, AAA- and BBB-rated Canadian bonds all saw improved performance in 2024 as the BoC began easing.

Surprisingly, Canadian investment-grade industrial and energy bonds held up well in February, despite these sectors being most exposed to tariffs.

However, that could change, depending on how long the tariffs on Canadian goods last.

Canada faces serious tariff risks because of its trade revenue exposure to the U.S. The full extent of the impacts on the Canadian fixed-income market are to be seen, said Robin Marshall, director of global investment research at FTSE Russell.

“The initial credit reaction to tariffs has been modest. It’s very early days. Of course, there’s been so much uncertainty and chaos about their timing, duration, and … with the effects on supply chains,” Marshall said during the webinar.

“But some reduction in risk appetite is already discernible. We’ve seen that in equity market performance, particularly, but not so much yet in credit.”