Q2 2026 Fund Commentary

Commentary and opinions are provided by TD Asset Management Inc..

Market commentary

The second quarter of 2026 was characterized by a mixed macroeconomic backdrop, as persistent economic softness offset a modest uptick in inflation. Canadian growth weakened further at the start of the year, with first-quarter gross domestic product declining by 0.1% on a quarter-over-quarter annualized basis, following a 0.6% contraction in the fourth quarter, resulting in a technical recession. Headline inflation rose to 3.2% year over year in May, largely reflecting higher energy prices. However, underlying price pressures remained contained, with core inflation measures holding close to the Bank of Canada's (BoC) 2% target, as excess capacity in the economy continues to provide a disinflationary offset.

The BoC maintained its policy rate at 2.25% throughout the quarter, reiterating a data-dependent approach as it balances externally driven inflation pressures against a still-soft domestic growth backdrop. While the earlier escalation of conflict in the Middle East contributed to heightened uncertainty and rising energy prices, subsequent de-escalation alleviated near-term inflation concerns and reduced the risk of prolonged supply disruptions. Market expectations for additional policy tightening were scaled back over the quarter.

Canadian fixed income markets posted positive returns in the quarter, supported by declining government bond yields. The yield curve flattened, with longer-term yields leading the move lower. Yields on two-year Government of Canada bonds declined by roughly 8 basis points (bps), while 30-year yields fell by nearly 12 bps during the quarter. The decline in yields reflects a combination of easing geopolitical risk, moderating inflation expectations and a reassessment of the policy path.

Corporate credit markets remained resilient, with spreads tightening by roughly 7 bps over the quarter, falling back to pre-conflict levels. The narrowing in spreads was supported by the easing of geopolitical risks, strong issuer fundamentals and continued investor demand for income amid elevated all-in yields. Credit markets absorbed a high level of new issuance, including significant activity from large global issuers, reflecting the strength of technical conditions in the asset class.

Performance

The Fund is a passive index strategy designed to track the FTSE Canada Universe Bond Index, while excluding BBB-rated bonds at the time of purchase.

The Fund's exclusion of BBB-rated securities weighed on relative results during the quarter because that segment outperformed the broader benchmark. The Fund's tracking difference remains within expectation on a one-year and four-year basis.

Portfolio activity

There were no significant trades during the quarter. The Fund is a passive index strategy, and portfolio activity reflects index rebalancing rather than active positioning decisions.

Outlook

In the sub-advisor's view, the macroeconomic backdrop remains balanced but uncertain. Easing energy prices have reduced near-term inflation risks, allowing central banks to remain patient as they assess incoming data. While U.S. growth and inflation remain firmer than in Canada, much of the associated policy risk appears priced in. In Canada, soft but stabilizing growth and contained underlying inflation support a more measured policy outlook. Key risks include renewed geopolitical tensions, more persistent U.S. inflation, and uncertainty surrounding Canada-United States-Mexico Agreement negotiations.

From a credit perspective, the sub-advisor believes corporate fundamentals and technical conditions remain supportive, with strong investor demand continuing to absorb new issuance. However, valuations remain near the tighter end of their historical ranges, and the sub-advisor expects sector and issuer dispersion to remain a key theme.