Despite geopolitical shocks, credit markets have been surprisingly resilient. Spreads are still historically tight, and investor appetite remains strong. Looking ahead, selective risk-taking is critical as fixed income investors have limited upside but the potential of losing their full investment. Click here for the full Corporate Bond Newsletter.
Moon shot
A truly proud moment for Canadians. Canso, along with the rest of the country, is celebrating the successful completion of the Artemis II space mission that sent four astronauts farther away from Earth than any human had previously travelled. London, Ontario-born Jeremy Hansen represented the Canadian Space Agency and became the first non-American to travel outside of low Earth orbit. Jeremy is a Royal Military College of Canada (RMC) graduate, Diamond Jubilee Medal recipient and Royal Canadian Air Force colonel.
Rocket Man
Enter Elon Musk. Musk filed Initial Public Offering (IPO) paperwork for his company SpaceX on the day of the Artemis II launch. “The confidential filing initiates a public listing process which Musk is targeting to be the largest in history, aiming to raise US$75 billion on a US$1.75 trillion valuation,” the Canso team noted. “SpaceX’s offering combines a rocket launching business, the Starlink satellite communications network and the Artificial Intelligence (AI) startup xAI. The combined entity is rumoured to generate approximately US$25 billion of revenue this year, pinning the valuation at a 70x revenue multiple. In June, the Musk’s marketing roadshow is expected to kick off and will be targeting a higher percentage of retail investors relative to other mega-IPO’s. They added that Musk won’t be focusing prospective investors on current figures; he will be selling those investors a dream of the future.
Dire Straits
“Oil markets were rocked following President Trump’s initial strikes on Iran. Global benchmark levels quickly rose over 60% in price, surpassing US$100/barrel for the first time since July 2022. As the U.S. and Iran grapple over the Strait of Hormuz, the price of oil continues to whipsaw. Investors are actively assessing the length of the conflict, damage to infrastructure in the region, and the supply response from other areas globally,” the team pointed out. The open and closing of the strait is impacting prices. “Especially notable, was the price action following the weekend of March 7th – 8th,” they continued. The Generic 1st Brent Futures contract reopened Sunday night and quickly rose US$26 above where it had closed on Friday. By Monday morning, the price was still elevated, but by Monday night, this contract had fully “roundtripped” and was sitting below Friday’s closing level. A remarkable move of US$55 dollars over the day.
Government bond yields swung, corporate bond premiums have not repriced
The team at Canso points out that government bond yields have also reacted sharply to the conflict. “Through the end of February, yields fell as investors increasingly sought safety in bonds. Sentiment shifted in March with the escalation of the conflict and yields quickly reverted with a pronounced move higher,” they noted. Adding that the market is now only pricing in 1 cut in the U.S. for 2026, while the Canadian market has completely flipped from a cut in 2026 to a hike.
However, they wrote that despite all the volatility across capital markets so far this year, risk premiums on corporate bonds have not materially been repriced.
“Canadian spreads moved wider by 4 basis points (bps), to end March 31st at 93 bps, whereas U.S. spreads were out 11 bps to finish the quarter at 90 bps. Since then, spreads have rallied back to where they began the year. All the while, corporate bond markets have absorbed significant levels of new issuance, including some historically large debt financings in the U.S.,” the team at Canso wrote.
Just like in equity markets, both the broad Canadian bond market and Canadian investment grade corporate bond market delivered modestly positive returns, while equivalent U.S. indices posted slightly negative performance. “However, Canadian yields were more anchored than those in the U.S. High yield and leveraged loan indices were the weakest performers in fixed income in the first quarter of 2026, as credit spread widening,” the authors wrote.
There is room for upside if LRCN calls materialize
Limited Recourse Capital Notes (LRCNs,) which were introduced into the Canadian market in 2020, have a unique structure with a long final maturity date (60+ years), and a 5-year reset structure, where issuers can call at par, or reset the coupon based on the then prevailing 5-year Government of Canada yield plus a fixed initial credit spread.
Last summer, the Canso team discussed reset expectations for the first cohort of LRCNs issued in 2020 as they approached their initial reset dates. “Reset spreads for those early issues ranged from 394 bps to 414 bps. This exceeded comparable new issuance levels, which led us to expect that issuers were very likely to call their bonds. Indeed, all four of these issues were called,” the authors noted.
“There is significant speculation for the remaining LRCNs with calls later this year as many have reset spreads below 300 bps. Call uncertainty leads these low reset issues to trade as part short-dated callable bond, and part longer-dated credit, creating greater price sensitivity and repricing potential… Extension is already at least partly priced in, while there is room for upside if calls do materialize and the securities accrete to par,” the Canso team added.
Canadian investment grade bond issuances continue unabated
2025 was a record year for new issuance in the Canadian investment grade corporate bond market, and despite that new issuance in Canada started this year 30% ahead of last year’s pace. Meanwhile, in the U.S., investment grade issuance also hit a record of US$619 billion in the first quarter, led by hyperscalers Amazon, Oracle and Google seeking to fund the AI revolution.
“In the sub-investment grade bond market, high yield credit spreads have also remained contained throughout the geopolitical events of the past weeks. In fact, spreads came nowhere near the blowout of Liberation Day widening and are still well inside their long-term average. With major equity markets now at all-time highs, the appetite for risk continues to endure, and this has carried over to the high yield bond market,” the newsletter authors wrote.
The Canso team warns that in the investment markets, as in life, there is no such thing as a free lunch. “Higher yields are often achieved by taking on more credit risk, loosening covenants, increasing complexity, adding leverage or giving up liquidity. In private credit, the advantage is typically giving up short-term liquidity to achieve greater long-term returns,” they noted. “Illiquidityis a feature, not a bug. Investors are now questioning what it really means to give up liquidity. Redemption requests have increased as investors have become weary of credit risk and valuations, so much so that funds have been required to restrict redemptions, typically at 5% of invested capital per quarter.”
Make sure you’re compensated for any risk
Fixed income investors have limited upside but the potential of losing their full investment, so if you are in a poorly structured deal, where you have no security, other lenders rank ahead of you, or the company can move assets away from your domain, the downside can be severe.
“Confronted with this reality, credit investors need to be compensated in the form of credit spreads. We are happy to take on risk when we are compensated to do so. What’s more difficult is being disciplined and not taking on risk when the prospective returns are not commensurate. Outside of our special situations, we prefer the relative value in high-quality and highly liquid positions,” the team at Canso noted.
Disclaimer: This story was created by Canadian Family Offices’ commercial content division on behalf of Canso Investment Counsel Ltd., which is a member and content provider of this publication.