In their latest quarterly Market Observer, the team at Canso Investment Counsel Ltd., a leading Canadian institutional investment management firm, discusses the incoming Fed Chair, the Canadian housing market decline, and the potential for financial market repricing. Click here for the full Market Observer.
A new Fed Chair is sworn in, and an old Fed Chair passes away
This past quarter, on May 24, new incoming U.S. Federal Reserve (Fed) Chair Kevin Warsh was sworn in. A few weeks later, on June 22, Alan Greenspan passed away. He was 100 years old, and in his time, served as the Fed Chair for nearly two decades, during which time the American economy flourished.
At his swearing in, Warsh acknowledged the outsized impact Greenspan had on his life, saying, “Chairman Greenspan was the first to tell me and show me what this role demands…Like Alan, I intend to fill the role of chairman with energy and purpose.”
To the team at Canso, Warsh’s comparisons with Greenspan couldn’t be more obvious. The new Fed chair began his term by severely curtailing the statement released after the rate-setting meeting. He also removed forward guidance that signalled the Fed’s next move to the markets. He declined to submit his “dot plots” to where he sees interest rates headed this year and next. Warsh talked about productivity-led growth caused by artificial intelligence as “not something that we fear but something we embrace.”
The Canso team notes in the July Market Observer that a less communicative Fed may cause increased volatility in the Treasury market, which they don’t think is a bad thing. “However, increased volatility may lead investors to demand additional compensation. Given the borrowing needs of the U.S. treasury, any additional premium demanded by investors may deteriorate the government’s fiscal situation,” they warn.
The authors write: “We at Canso think that these are early days and the jury is still out. We would need more convincing.”
We are skeptical about AI-led productivity growth when this technology is still in its infancy. Thus far, it is a race to spend and outpace each other.
The Canso team
The team points out that the five largest hyperscalers are tapping the bond market aggressively, which may cause a “crowding out” of other borrowers including the government. They also flag a planned taskforce on data gathering.
“What if it produces a statistic that is at odds with ‘old fashioned’ survey methodology? Which would the market believe in? Which would the less communicative Fed believe in? We know which one the U.S. president will believe in,” they note.
Do what Trump wants… Or else…
The U.S. president has an outsized impact on goings on, and it is useful to look at areas where his influence has been most disruptive.
The team at Canso is concerned that the U.S. president will try to oust any Fed governor who does not agree with lower rates. “He tried it with Lisa Cook, a sitting governor. He came close. Under the Federal Reserve Act of 1913, Fed governors can only be removed ‘for cause’ by the president. And ‘for cause’ remains a debatable term,” they write.
And it’s not just the Fed Chair facing the temperamental tantrums of Donald Trump. The new and yet-to-be-opened bridge connecting Windsor and Detroit, named after Gordie Howe, has been caught in the crossfire of the Canadian and U.S. governments.
On June 26, Bloomberg News reported that Commerce Secretary Howard Lutnick intervened to delay the opening of the bridge and is looking to renegotiate the deal for a larger share of the toll revenue. Then on July 10, President Trump posted a statement indicating that a renegotiation had taken place resulting in a better deal for the U.S. Since this announcement, there has been significant confusion about the exact details of the deal. Indications are that the original agreement for Canada to recoup construction costs prior to a sharing of tolls is no longer the case.
“Sometimes in financial market transactions one party may have leverage over another party and could choose to modify a pre-struck agreement at the 11th hour to gain better economics (sometimes referred to as ‘retrading’). The problem with renegotiating a deal is that what you gain today, you may pay for in the future. So, while the party driving the renegotiation thinks they extracted additional value in the short-term, it’s more difficult to measure in the long-term,” the Canso team writes.
Canadian housing market freefall continues
The Canadian housing market has seen a steep decline in price from its peak in 2022, about 20 per cent nationally and over 30 per cent in some cities. Despite the drop, housing remains unaffordable for many new home buyers as income levels have not kept pace with house prices.
There are multiple facets to this problem, as the Canso team writes. “As condos remain unsold, developers are complaining. They are unable to sell enough units to qualify for construction financing. A CIBC research report indicated that close to 6 per cent of the mortgages will face more than a 40 per cent increase in mortgage debt payments upon renewal this year. For many of them in Ontario and British Columbia, home prices are below their level from 2021. An RBC research paper mentions that the construction industry contributed to 6.8 per cent of Ontario’s GDP in 2023.” They also highlight population declines as a factor impacting this equation.
The authors of the newsletter write that it is not that the current exposure is “manageable,” it is the rise in cortisol among bankers that comes as losses climb, which is followed by an aversion to risk taking that causes panics and economic downturns.
To improve the situation, the federal and British Columbia governments have developed a plan to purchase B.C. condos and turn them into affordable housing. This has come on top of last year’s decision to cut development charges that builders pay municipalities.
Credit markets are largely unchanged
While volatility continues in housing, much of the rates and credit markets have finished the first half of the year largely unchanged.
The Canso team writes that 10-year Canadian government yields rallied a modest five basis points (bps) over the first half of 2026, closing at a yield of 3.38 per cent. Both Canadian and the U.S. Investment Grade spreads showed a slight tightening of 2 bps for the first half; closing the Canadian index at a spread of 87 bps and the U.S. at 77 bps.
However, despite the muted changes, the team points out that where a portfolio sat on the curve did make a difference. “Within the Canadian Corporate market, owning a portfolio of bonds in the middle of the curve (5-10 years) with an average duration of 6 years, has given you a better return by 46 bps versus a “barbelled” portfolio of bonds consisting of front-end (1-5 year) bonds combined with some long-end (10+ year) bonds where again the average duration of the portfolio calculates to 6 years. This disparity was partially driven by a sell-off in front-end Canada bonds, where we saw the yield on 2-year Canadian Government bonds move 17 bps from 2.57 per cent at the start of the year to 2.74 per cent on June 30,” they write.
They also note that the Corporate Index, despite having a higher running yield, has a higher weight of short bonds versus the Broad Index, which were impacted by the sell-off in front-end rates. “Within the High Yield bond market, BBs are growing as issuers are happy to borrow at historically very tight spreads. Single-B issuers have trended towards the leveraged loan market, with growth of approximately US$95 billion in Single-B rated issues in the Morningstar LSTA U.S. Leveraged Loan Index since the end of 2023.”
What’s the plan?
As the team at Canso maintains, “We cannot predict with certainty the timing and cause of financial markets repricing. The current market conditions reinforce our intention to keep our clients’ assets invested in securities which we believe will weather a storm. Investors should take a hard look at their portfolios to ensure they have the flexibility and capacity to take advantage of a sell-off fuelled by a wholesale deleveraging.”
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.