Q2 2026 Fund Commentary

Commentary and opinions are provided by Canada Life.

Market commentary

Bond yields fell during the quarter. Long-end yields were stable in April but began to move lower over the latter half of the quarter. Yields tracked oil price movements quite tightly through the first two months of the quarter, although that relationship weakened in June when bond yields didn't follow the fall in oil prices that accompanied the preliminary peace agreement signed in mid-June between the U.S. and Iran.

The Bank of Canada (BoC) met twice during the quarter and left its policy rate unchanged at 2.25%. The BoC reiterated that the conflict in the Middle East and U.S. trade policy uncertainty require continuous monitoring, and highlighted that it hasn't seen inflation from higher oil spreading into other consumer prices. The BoC also stated it stands ready to respond as needed. The U.S. Federal Reserve Board (Fed) remained on hold at both meetings in the quarter and welcomed a new Chair for the June meeting. The market is pricing in less than one rate increase from the BoC by year end and just over one increase from the Fed through to December. As expected, headline inflation in Canada began creeping higher in the second quarter because of higher oil prices, but core prices remain stable around 2%.

Performance

The Fund's duration (sensitivity to interest rate changes) contributed to performance. The Fund had a long duration positioning during the first two months of the quarter, in the expectation that yields would rally.

An underweight allocation to Province of Ontario (3.90% due 2036) contributed to performance. The Fund was positioned underweight the shorter end of the Province of Ontario curve, which underperformed the longer end of the province's curve.

An overweight allocation to corporate bonds detracted from performance in the quarter. Corporate bonds underperformed the index overall. April saw some spread compression, but spreads moved slowly wider into the end of the quarter.

Coastal GasLink Pipeline Ltd. (4.868% due 2045) detracted from performance. The sub-advisor held an overweight allocation to this bond, which underperformed the average Coastal GasLink Pipeline bond and the average energy bond within the long-term index.

Portfolio activity

The sub-advisor added Alphabet Inc. and Amazon.com, Inc. bonds at new issue. These were inaugural maple issuers to the Canadian market, and the deal sizes dwarfed previous deals in the Canadian market. The sub-advisor increased existing BCE Inc. holdings in the long end. During the quarter, BCE tendered specific lines across its curve. The Fund held one of these lines, and the proceeds of the tender were reinvested into one of the remaining long BCE issues. The sub-advisor sold a Canadian Natural Resources Ltd. bond, which had rolled out of the index, and used the proceeds to fund a purchase of a different corporate bond. The sub-advisor also reduced Province of Ontario bonds, using them as a source of liquidity against the purchase of other provincial bonds.

Outlook

Going into the third quarter, the sub-advisor maintains an overweight allocation to corporate bonds. In the sub-advisor's view, spreads have remained relatively stable despite record issuance in the primary market, and spread performance could remain stable over the summer months given the expectation of reduced primary market activity.

The Fund maintains a slightly short duration positioning. In the sub-advisor's view, despite ongoing global uncertainty, yields could increase over the next quarter and into the end of the year with the possibility of future interest rate increases. The sub-advisor also looks to adjust the portfolio to take advantage of a flattening yield curve. The sub-advisor will continue to monitor spreads in both provincial and corporate bonds, and the impacts on both related to issuance to date and the possibility of increased issuance through to the end of the year.