November 28, 2025
Commentary
The monthly commentary discusses recent developments across the Ninepoint Diversified Bond, Ninepoint Alternative Credit Opportunities and Ninepoint Credit Income Opportunities Funds.
It certainly felt like 2025 was a very, very long year. We will go into the details of our performance attribution within the coming December commentary. For now our commentary will focus on our 2026 outlook. We will start with our overall macro and central bank view, followed by our thoughts around credit markets, concluding with a discussion on the various risks to our outlook, and how we are positioning the portfolios for potential opportunities and risks.
Monetary Policy Outlook and The Impact on Interest Rates:
Starting with the Bank of Canada (BoC), the message is pretty clear: monetary policy is in a good place, and only a material deterioration of the situation would prompt them to respond with lower rates. This makes sense: the overnight rate is now at 2.25%, the lower bound of what they consider neutral (i.e. the interest rate that neither stimulates nor restricts economic activity). The economy is soft but not deteriorating any further, and inflation has been hovering just above 2% all year. To paraphrase the BoC: the trade war is inflicting pain to the economy, but monetary policy is not a good tool to help alleviate this pain, and therefore no need to loosen rates any further, making a hold the most likely policy stance for the foreseeable future.
For now, the bond market is taking the BoC at face value, with very little chance of a cut priced-in for 2026. In fact, the solid employment report for November led to a 30bp hike being priced for late 2026. This is probably a little ambitious, as the Canadian economy remains weak, the housing market is undergoing a long adjustment period, and several sectors are still reeling from the trade war. But if cuts are no longer in the cards, then the market will start thinking about the next hike!
So, if the rate cut cycle is now over, what does that mean for bond investors? Very few bonds are linked to the BoC’s overnight rate (aside from floating rate notes), and most take their cue from rates across the yield curve (2-years all the way to 30-years). So, the shape of the yield curve and the direction of rates along it matters a lot more than the overnight rate.
To provide some context, we show in Figure 1 below a bit of history: since the 1990s, the BoC’s overnight rate, market expectations for the next 12 months (dashed line), and the Canadian 10-year government bond yield.
For the past several years, we had an inverted yield curve, with short term rates higher than long term rates. This is a very unusual situation that only happens when monetary policy is very restrictive. For the past two years, the BoC has normalized rates from a very high level and we are now very likely at the end of the rate cut cycle. This is the time when the yield curve typically takes back its normal shape, by re-steepening (i.e. long-term interest rates higher than short term interest rates). This conceptually makes sense and that’s why it’s called a normal yield curve. Wouldn’t you expect to earn more yield to take the risk of lending money out for 10 or 30 years as opposed to 1 or 2 years?
So, how much should the curve re-steepen? No one knows exactly, but we’ll try to provide a sense of magnitude and timing demonstrated in Figure 1, using the blue arrows. For the past three decades or so, we have found that the yield curve is at its steepest right around the end of the BoC’s cutting cycles, and the difference between the overnight rate and 10-year yields typically ranges between 2.5% and 3.5% (we can do the same across the curve, but we focus here on 10-year for simplicity). So, assuming that the BoC is really done cutting, with the overnight rate at 2.25%, we should expect the 10-year government bond yield to move toward the 4.75% to 5.75% range. Granted, this is a wide band, but with the 10-year at only 3.4% right now, 10s really look expensive (bond prices drop when yields go higher). We aren’t there yet, but we think at a better entry point the 5 to 10-year part of the curve will prove to be a great investing opportunity.
Turning to U.S. monetary policy and interest rates, the Fed is torn; inflation remains stubbornly high, stuck around 3%, while the labour market has come to a standstill, with unemployment slowly but steadily rising. The two sides of their dual mandate are in tension, a rather uncomfortable position to be in. Adding further complexity to the mix, President Trump is likely to nominate Kevin Hassett, a devout servant, to the role of Fed Chair, putting additional political pressure on the institution to lower rates, irrespective of the economic reality.
This raises several issues going into next year, broadening the range of possible outcomes.
For example, should the new Fed Chair try to lower rates rapidly, as desired by his boss in the White House, would the rest of the committee oblige? The Chair only carries one vote. While it has never happened in the history of the Fed, it is possible, if not probable, that the rest of the committee votes against the Chair if it judges that the proposed rate cuts are against the mission of the institution. This raises the spectrum of even further political interference at the Fed, with the White House pushing to replace more of the FOMC with its own candidates. This has would have significant implications for U.S treasuries and the dollar.
Now what if the labour market stabilizes here, growth rebounds and inflation moves back up, driven by tariff pass through and fiscal stimulus (the “One Big Beautiful Bill” individual tax provisions will start impacting consumers in the first quarter of 2026 as Americans file their 2025 tax returns)? Would a Hassett Fed hold rates steady, or even consider hiking them, despite the objections of the President? Higher inflation in that scenario is a real risk, it could rear its ugly head once again, driving long-term rates much higher in a repeat of the 1970s.
We do not think that markets would like any of those two scenarios. They aren’t our base case, but they are clearly not just tail risks, but possible outcomes.
Now, if we assume the Fed does its job as expected, the labour market doesn’t deteriorate much more and that political interference doesn’t materialize, current market expectations (Figure 2, dotted line) are for the FOMC to cut rates to about 3% in 2026, taking the Funds rate around neutral and completing the rate cut cycle. That seems like a good baseline scenario. In this context, what should the yield curve look like?
With this most recent monetary cycle, the U.S. is about 6 months behind Canada. Canada raised rates earlier, and started cutting them sooner than the U.S.. And the same lag will be evident when forecasting the shape of their yield curve. The U.S. curve currently remains extremely flat, as shown in Figure 2 above, the Fed Funds rate (the U.S.’s overnight rate) is not that different from the rate on 10-year government bonds. As we approach the end of the rate cut cycle, we should expect the yield curve to re-steepen. Indeed, the last time the Fed funds terminal rate was at 3% (early 1990s), 10-year rates were oscillating between 5.5% and 6.5%, versus 4.15% today at the time of writing. In other words, even with the Fed cutting overnight rates, our expectations are for term-rates to increase along the yield curve, as they have done for the past several decades at the end of the cut cycle. Therefore, just like in the Canadian bond market, we believe it is prudent to keep U.S. duration low, and wait for better entry points further along the curve, once rates have risen (and bond prices dropped).
To summarize, our base case for 2026 is that the BoC is done with the rate cut cycle and they remain on hold. At the Fed, one or two more rate cuts are possible, taking the Funds rate to around 3-3.5%, followed by a period on hold. Not overly exciting. But, with the end of the cut cycle comes a steeper yield curves, and higher bond yields across the curve, offering us compelling reinvestment opportunities at much higher yields as the year progresses.
Credit Markets
When thinking about the behaviour of credit spreads (e.g. compensation for the risk of default), there are several important considerations, which we summarize into two categories: fundamental factors and technical factors. Fundamental factors like the health of the economy, industry dynamics, company profitability and capital allocation decisions are clearly important for assessing the appropriate compensation for default risk (i.e. credit spreads).
But often, and 2025 was such a year, supply and demand considerations (i.e. what we call technical factors) take precedence. Despite record investment grade (IG) and high yield (HY) issuance in Canada, near record IG issuance in the U.S. (Figure 3 shows historical IG issuance in both markets), demand for credit was so robust that spreads tightened, even to pre-2008 levels in some cases.
Regardless of the volatility in the month of April, 2025 was a great year for North American credit markets. Credit spreads started the year at multi-decade tights, but still found a way to tighten into year end, driven by an insatiable appetite by investors for corporate bonds. Figure 4 shows historical U.S. IG credit spreads, currently in their 6th percentile.
As we consider both fundamental and technical factors, what should the outlook be for credit spreads in 2026?
On the fundamental side, overall, company balance sheets remain in good shape, thanks to the relative cautiousness of the post pandemic era. However, we are starting to see more M&A activity, which is typically funded with debt and leverage. In the U.S. market in particular, the Artificial Intelligence capital investment boom is accelerating, requiring loads of capital, an increasing portion of which is being funded with debt. So, while we are starting from a good place, fundamental credit conditions could deteriorate in 2026, as corporations take on more leverage, while the financial benefits of AI capex take time to improve earnings.
Turning to technical considerations, supply in North America is set to increase in 2026 outpacing even 2020 with close to $2tn of new issuance expected in the U.S. IG market (Figure 3 above shows 2026 new issue expectations from the three largest investment dealers). Here in Canada, we are still waiting for sell-side supply forecasts, but corporate bond issuance is highly correlated with the U.S., so we should also expect a bumper year here.
Who will absorb all this supply? Historically, investment funds, pension funds, and insurance companies have been the largest buyers of corporate bonds, and as long as they see inflows, supply should be met with ample demand. However, increasingly corporate bonds are competing with government bonds, which, due to low credit spreads, are increasingly attractive, but also have very large funding needs thanks to ever rising deficits.
Overall, credit spreads are already close to all time tights, and we are expecting slightly deteriorating fundamentals matched with a record amount of supply, so it is hard to be overly excited about taking a lot of credit risk at this juncture. Better to be patient and wait for a better entry point within credit markets. Careful with companies that could be active in M&A or have very large funding or CAPEX needs.
Risks to the Outlook
For brevity’s sake, we present some of the key risks we see for 2026 in the table below, along with the likely impact on rates and credit, and some of the risk mitigators we can employ (some of those are already in the portfolios).
One theme is consistent with these risks: credit spreads might move wider under all of them, supporting our tactical use of CDX put options to hedge against a rapid move wider in credit spreads. On the rates front, notably absent is a scenario where short rates move higher, simply because in our view, those economic risks are to the downside, while the only upside risk to the upside (the return of inflation) is mitigated by a more politicized and therefore dovish Fed. However, the distribution of outcomes for longer term rates is much wider, ranging from the typical risk-off rally to a material sell off should inflation return. With implied volatility in long term rates still extremely subdued despite the wide range of possible risks and outcomes, it makes sense for us to buy volatility/optionality in a long-term bond instrument such as TLT.
Funds Positioning
Against our base case outlook of potentially wider credit spreads, and higher interest rates across the curve, what is one to own? Well, as bond investors, we look forward to higher coupons and income, but are careful about being too early in adding duration or credit risk, we want to buy post sell-off, not prior. In the meantime, we have focused on building robust portfolios that maximize yield, while minimizing the impact of potentially higher rates or credit spreads.
Here are a few places where we have found value:
- First Generation Hybrid Bonds: Issued by midstream, pipeline and utility companies, they rank below senior unsecured bonds in the capital structure, attracting a partial equity credit from the rating agencies (helps with leverage metrics). As they come up to their call date, the coupons step-up (i.e. increase) causes them to lose that equity treatment, becoming expensive debt. Companies therefore have a very strong incentive to call those and retire them at that time. Those hybrid bonds have yields-to-call ranging from 4%-6.5% with ~2 years or less to that call date, making them perfect candidates to increase income, while remaining defensive in both credit and rates. Our funds have a ~30% allocation to these types of securities, in both USD and CAD.
- Asset Backed Securities: Canada is a particularly interesting market for ABS. There is less competition for bonds (not index eligible), keeping them generally cheap to comparable traditional corporate bonds. We generally buy senior or mezzanine tranches, keeping duration low and laddering them as much as possible, given their lower liquidity vs traditional corporate bonds. Our allocation to this asset class ranges from 15% to 25%.
The rest of the portfolios are invested in investment grade corporate bonds and a modest amount of higher quality HY bonds, resulting in the aggregate portfolio characteristics shown in the table below.
Credit quality remains high, averaging BBB+ to A- (excluding the impact of CDX hedges), while duration and spread duration are at extremely conservative sub-3-year levels. Nevertheless, the funds have yield-to-maturities ranging from 4.6% to 5.6%, which we consider attractive, given how light on risk our positioning is.
Conclusion
This is our starting point for 2026. Assuming all our forecasts are directionally correct, we should expect higher medium- and long-term rates as yield curves steepen. Add that to mildly higher credit spreads and you get superior all-in-yields which provide higher reinvestment opportunities. Given all the uncertainty in 2025 we’re feeling more certain in 2026! Lots to look forward to!
Happy Holidays, see you next year!
Mark, Etienne & Nick
As always, please feel free to reach out to your product specialist if you have any questions.
Ninepoint Diversified Bond Fund
NINEPOINT DIVERSIFIED BOND FUND - COMPOUNDED RETURNS¹ AS OF NOVEMBER 28, 2025 (SERIES F NPP118) | INCEPTION DATE: AUGUST 5, 2010
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|
Fund |
0.27% |
4.40% |
1.45% |
2.62% |
4.71% |
5.98% |
1.54% |
2.84% |
3.60% |
Ninepoint Alternative Credit Opportunities Fund
NINEPOINT ALTERNATIVE CREDIT OPPORTUNITIES FUND - COMPOUNDED RETURNS¹ AS OF NOVEMBER 28, 2025 (SERIES F NPP931) | INCEPTION DATE: APRIL 30, 2021
1M |
YTD |
3M |
6M |
1YR |
3YR |
Inception |
|
|---|---|---|---|---|---|---|---|
Fund |
0.21% |
4.41% |
1.49% |
3.11% |
5.19% |
7.57% |
2.95% |
Ninepoint Credit Income Opportunities Fund
NINEPOINT CREDIT INCOME OPPORTUNITIES FUND - COMPOUNDED RETURNS¹ AS OF NOVEMBER 28, 2025 (SERIES F NPP507) | INCEPTION DATE: JULY 1, 2015
1M |
YTD |
3M |
6M |
1YR |
3YR |
5YR |
10YR |
Inception |
|
|---|---|---|---|---|---|---|---|---|---|
Fund |
0.15% |
4.47% |
1.46% |
3.04% |
5.13% |
7.30% |
4.48% |
5.29% |
5.00% |