After the “everything rally” of 2025, the team at leading Canadian institutional investment management firm Canso Investment Counsel wrote in their latest Corporate Bond Newsletter that now’s the time to build liquidity so that you have the freedom to act with conviction when the cycle turns, whenever that may be. Read the full Corporate Bond Newsletter.
Everything’s up, for now
In 2025, the Blue Jays captured the hearts of Canadians with an improbable run to the World Series. Now, the Olympics are on the horizon. All of this evokes a sense of Canadian pride in the face of ever divisive issues. We are certainly operating in an environment of heightened uncertainty, though you wouldn’t know it from looking at financial market results.
As the January Canso Corporate Bond Newsletter pointed out, despite tariff uncertainty, persistent geopolitical tensions and the longest U.S. government shutdown in history—plus, a host of other macro and policy risks; markets charged ahead. The markets delivered an “everything rally” in 2025, with equities, credit and select real assets posting broad-based gains.
Unusually, both traditional safe-haven assets and risk-on assets performed strongly at the same time, the Canso team noted. What was interesting was the divergence in safe-haven performance. The U.S. dollar weakened, while metals soared to record heights. Gold was up 65%, and silver was up an even shinier 148% in 2025. On the equity side, the S&P/TSX composite was the star performer, up 6.1% in the fourth quarter and 30.8% for the year, outpacing its U.S. counterparts in a period that favoured financial and materials sectors. As the Canso team pointed out, this was only the third time in the past 15 years that the TSX generated a higher annual return than both the Nasdaq Composite and S&P 500 indices, which were up 21.1% and 17.9%, respectively, in 2025.
Bonds underperformed equity markets both in the quarter and for the year, but still delivered gains. The exception was the Canada Broad Bond index, which was down -0.4% in the fourth quarter, as government bonds were adversely impacted by a steepening yield curve. Despite negative quarterly performance, the index ended the year up 2.4%. Investment grade and high yield corporate indices did better, returning between 4.3% and 8.5% in 2025, as credit spreads continued to tighten in.
Canada strong?
The 2025 Canadian Federal Budget was designed to respond directly to heightened uncertainty with the United States and broader global disruption by pivoting toward economic self‑reliance and strategic investment. The authors of the latest newsletter expect that to support Canadian industries, federal contracting will increasingly emphasize “buy Canadian” sourcing, while defence and competitiveness measures attempt to fortify the economy against external shocks—all of which comes at a significant cost, with Ottawa projecting a sharp increase in the budget deficit.
“The bond market has taken notice with long-term government bond yields continuing to face upward pressure as investors price in an increased supply of debt to come,” the Canso team wrote. Rising long-term government bond yields in Canada negatively impacted bond market performance in 2025. The ICE BofA Canada Broad Index returned just 2.4% in 2025 because of a negative contribution of -1.0% from the long-term bond component. The impact of higher yields was softened by strong performance in corporate bonds. The Canada Corporate Index was up 4.3% for the year, with a much better 2.5% contribution from long-term bonds.
Conversely, the short end of the curve moved in the opposite direction.
“The Bank of Canada cut rates 4 times in 2025, each time lowering administered rates by 25 basis points (bps). It looks to be on hold for now. The result has been a steepening of the Canadian yield curve,” the Canso team pointed out.
The hunt for yield continues
The team at Canso notes that risk premiums for investment grade corporate bonds continue to be supported by a persistent demand for yield. In the U.S., credit spreads finished modestly tighter on the year and remain historically expensive. Falling government bond yields helped deliver a strong 7.8% annual return for the U.S. Investment Grade Corporate Index. The story was different in Canada. Although credit spreads outperformed U.S. tightening, rising long-term government yields restrained the Canadian Investment Grade Corporate Index return to 4.3%. In total, Canadian spreads narrowed 25 bps over the year, whereas the U.S. narrowed 4 bps.
“The pursuit of yield continues to extend into lower quality bonds. Looking at valuations of high‑yield bonds, credit spreads remain expensive by historical standards. Investors are having little issue looking beyond the surge in liability management transactions or headline catching defaults. We continue to believe that outside of special situations, the risks in high yield bonds are asymmetric for investors,” the authors warned.
TELUS’s tip-top tender
In December, BBB-rated TELUS Corp. launched a significant cash tender offer in Canada to repurchase up to $500 million of several series of its outstanding debt, spanning maturities from 2031 to 2051. Bondholder participation far exceeded the initial tender cap as the company offered to repurchase outstanding bonds at up to 15 bps inside of secondary levels. TELUS ultimately upsized the initial $500 million offer, accepting all tendered amounts for five series of bonds, totalling $1.1 billion.
“The successful tender was in large part thanks to financing from concurrent junior subordinated note issuances. TELUS’s ability to complete the transaction underscores how receptive markets are to high-grade borrowers, even amid macro uncertainty,” the Canso newsletter noted, adding that in total, TELUS, Bell and Rogers executed $10 billion of tender offers in Canada and the U.S. in 2025.
The high-yield market revival
Meanwhile, the Canso team also kept an eye on the Canadian high yield market, which experienced a revival of sorts as new issuance increased to $7.3 billion in 2025, the highest since 2021’s $9 billion record.
“Despite the healthy year, it is still difficult to consider the Canadian high yield space a fully formed market. The Canadian high yield bond market sits at a meagerC$23 billion, or US$17 billion equivalent, compared to its U.S. counterpart at US$1.5 trillion and European counterpart at US$499 billion. Furthermore, the U.S. and European levered loan markets, which also include corporate issuers rated BB & Below, contribute an additional US$1.55 trillion and US$383 billion, respectively. Canada does not have a levered loan index,” the Canso team noted, adding that the U.S. market has 25% more Canadian issuers and almost four times the debt on offer.
Believe in the credit cycle
Markets were firing on all cylinders in 2025. Stocks continue to touch all-time highs, while credit spreads inch closer to historical tights.
Watch out. The Canso team, firm believers in the credit cycle, warned that markets appear priced for perfection, as investors ignore downside risks. “As we have been saying for some time, the balance of risks is highly asymmetrical. Calm markets instill confidence which leads investors to accept higher risks at tighter spreads. Tighter spreads lead borrowers to take on higher leverage and aggressive growth,” the team wrote. “Optimism grows, skepticism fades and the cycle continues. Until it doesn’t.”
For now, the team at Canso is building liquidity today so that they will have the freedom to act with conviction when the cycle turns—whenever that may be.
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