The high yield market continues to find optimism in low default rates supported by significant refinancing activity over the last year, even as the repricing of default risk has been more pronounced among high yield issuers. Meanwhile, in the first quarter of 2025, Canadian telecom powerhouses Rogers Communications and Bell Canada pulled on new financing levers with their inaugural issuance of Canadian hybrid securities. As the team at leading Canadian institutional investment management firm Canso Investment Counsel wrote in their latest Corporate Bond Newsletter, these are very uncertain times. Right now, the team is well positioned with a high-quality and highly liquid portfolio, ready to take advantage of more attractive investment entry points when they do emerge.
Click here for the full Corporate Bond Newsletter.
The risk of a recession is higher than before
It has been a whirlwind start to Trump’s second presidential term. To illustrate the turmoil that has characterized recent weeks, the team at Canso plotted the daily movements in high yield credit spreads dating back to 1997. They find that on the vast majority of the 7,000+ trading days plotted, spread movements of the high yield index are close to zero, but in the weeks following Trump’s so-called “Liberation Day,” when he announced unprecedented tariffs on dozens of countries, high yield credit spreads experienced historically large swings, in both directions.
“The old world order has been rocked with huge geopolitical and economic implications as the Trump Administration is targeting both friend and foe with tariffs. The total scale, breadth and duration of the Trump Tariffs remains uncertain, but the risk of recession is certainly higher than it was, as growth and employment outlooks deteriorate,” the April Corporate Bond Newsletter notes.
The Bank of Canada continued its easing cycle in 2025, leaving the policy rate at 2.75 per cent before moving to a “wait and see” posture in April, but Canso believes the BoC will likely continue to cut before the year is finished, even as the U.S. Federal Reserve has been much more measured. “Both the Bank of Canada, the Fed, as well as their global counterparts, will be challenged in determining the appropriate path for rates in what could be an evolving stagflation environment,” the Canso team wrote, adding that the relative aggressiveness of Canada’s cuts has contributed to a significant widening between U.S. and Canadian government bond yields, as the basis between the two continues to persist at historically wide levels.
Canada is caught in the crosshairs
Canada has found itself in the crosshairs of chaotic U.S. trade policy. Attacks on our industry and sovereignty have left a bitter taste in Canadians’ mouths, even as we are in the midst of the Canadian federal election. “Canadians who were previously focused on a domestic housing crisis, sluggish economy and the rising cost of living are now fully locked in on this country’s response to the U.S. trade war. This has helped the Liberals recover a 20-point deficit in the polls in a matter of weeks,” the newsletter noted.
“In the bond market,” the team wrote, “yields have changed course and are now decidedly higher in both Canada and the U.S. Stated explanations for the retreat from the ‘safety’ of bonds have ranged from hedge funds and large institutional investors unwinding positions, to theories of nefarious transactions by foreign governments. Perhaps the simpler answer reflects the prospects for higher inflation and increasing deficits. Either way, fixed income markets are now just barely keeping their heads above water.”
After leading the charts in 2024, LRCNs go the other way in 2025
The newsletter noted that the movement in investment grade credit spreads has been relatively muted compared to the volatility seen across other markets. During the first quarter, investment grade spreads widened 13 bps in Canada and 15 bps in the U.S. Since then, investment grade spreads in the U.S. have widened an additional 16 bps, while the Canadian market has been slower to reprice, with just 12 bps of widening across the index.
“If we dig deeper within the investment grade index in Canada and the U.S., we can see that the sell off across risk assets is only starting to translate into wider spreads for lower rated BBB bonds. Credit spreads in investment grade have performed well relative to other risk assets,” the newsletter pointed out.
In their previous newsletter, the Canso team highlighted that Limited Recourse Capital Notes (LRCNs) were a top performer in 2024, but so far in 2025, things have gone the other way.
“Since they began being issued, we have seen ‘high resets’ price at 400 bps and above, and ‘low resets’ price at 300 bps and below. The problem the ‘low reset’ LRCNs face is that as credit spreads widen, it reduces the likelihood these issues will be called on their reset date. As a result, they can trade as longer dated bonds with much more price volatility. As credit spreads tightened throughout 2024, the probability of these ‘low reset’ LRCNs being called increased, marching their prices back up. The inverse has been true so far in 2025,” the newsletter explained.
Telco hybrid bonanza
In the first quarter of 2025, Canadian telecom powerhouses Rogers Communications and Bell Canada issued hybrid securities. The Canadian tranches of the deals were both priced with coupons of 5.625 per cent, which the Canso team estimates is about 0.5 per cent higher than the telcos would have paid for long-dated senior unsecured issuances.
“Despite their higher servicing cost, the hybrid deals are attractive to Bell and Rogers due to a little dose of “financial engineering,” the team wrote. “From a rating agency perspective, the hybrid securities provide flexibility to the issuers as only 50 per cent of the par amount is classified as ‘debt’ when calculating their leverage metrics while the other 50 per cent is looked upon as equity. The 50/50 treatment is attractive as these companies work to contain their leverage ratios in an industry where competition is rising, and growth is moderating.”
The impact of tariffs on high yield issuers
The newsletter pointed out that the repricing of default risk has been more pronounced among high yield issuers, as investors contemplate the impact of tariffs on lower-quality borrowers.
“Spreads remain 100 bps inside the historic average of the index and are not yet at crisis-level valuations,” it noted. “The sharp move wider seems to be enduring off the lows given the market uncertainty and trace back to levels last seen at the end of 2023. While the market has moved to catch up to increasing default risk and uncertainty, valuations in aggregate are not yet screaming value. Given how volatile things have been, that could change quickly, and we are eagerly waiting for more compelling opportunities.”
Meanwhile, the newsletter said that investors continue to clamour for Collateralized Loan Obligations, a trend that is supporting the pipeline for new issue levered loans, pouring $49B into CLOs in the first quarter of 2025 and close to $200B into the asset class over the past 12 months.
“The levered loan market remains full of issuer friendly deal structures, which we believe remains an underappreciated risk to investors,” the Canso team wrote. “Weak structures have resulted in the increase in liability management transactions by issuers that can drastically weaken the collateral that supports the recovery of an issue. We believe this remains an environment where discriminate active management is needed to assess downside risk, but also to identify actual value opportunities amongst the volatility.”
Right now, wait for the right opportunities
In these uncertain times, the Canso team is staying true to their investment discipline.
“We often say that trying to forecast macroeconomic variables is a futile exercise, and this is true now more than ever,” they wrote. “We are well positioned with a high quality and highly liquid portfolio, ready to take advantage of more attractive investment entry points when they do emerge.”
For now, the team is standing by with patience, discipline and a long-term perspective, ready to navigate what lies ahead.
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