Quarterly report
More benign macro setting for 2026 energy shock
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Overview
Short Treasuries and Canadian government bond markets discount modest 25-50bp tightening moves in 2026-27 on inflation risks from the Q1 energy shock. This may be premature in Canada, given inflation at target and weak growth, though the Fed faces a bigger inflation challenge. Underestimation of interest rate risks in 2022 may explain this, even if APAC is more exposed in 2026. Adverse duration effects caused longs to under-perform in Q1, even as curves flattened. Credit held up well and remains a strong outperformer on 12M.
Key highlights:
- Macro and policy backdrop – More benign conditions than 2022 for an energy shock
- Spotlight on Middle East energy shock – APAC more exposed but global stagflation risk
- FX – USD regains some safe haven status. Yen suffers from Japan’s energy exposure
- US Treasuries and credit – Short breakevens spike and term premia increase
- Canadian governments, provinces and municipals – Short yields price in modest BoC tightening
- Canadian IG and HY credit – Investors re-price risk in Q1, but no major credit event to date
- Performance – Longs underperform after energy shock. USD rebound helps Treasuries
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