Mackenzie Canadian Core Fixed Income
Mandate commentary
Q3 2026
Highlights
① The portfolio slightly underperformed its blended benchmark ,as corporate credit and currency forwards outweighed positive government and futures positioning.
② Earnings growth provided a powerful tailwind for equities.
③ Inflation, energy costs pushed long-term yields higher.
Mandate overview
The third quarter was difficult for duration. The 10-year United States Treasury yield rose from 4.44% to 5.29%, as higher energy prices, the September U.S. Federal Reserve rate increase and persistent inflation moved markets away from an easing narrative. Artificial-intelligence-related financing added corporate supply at the long end, while resilient consumption, August unemployment of 4.1% and core personal consumption expenditures inflation of 3% year over year kept the growth backdrop firm.
Canada proved more resilient than expected. Data released during the quarter showed second-quarter growth of 3.3% annualized, supported by consumption, exports and investment. Population revisions reduced near-term housing concerns, but affordability, household leverage and mortgage refinancing remain constraints. The team expects any Bank of Canada tightening cycle to be shallow, with 2.75% the likely peak.
The portfolio maintained a meaningful corporate-credit overweight and government underweight. Corporate exposure averaged 54.4% and ended the quarter at 55.4%, compared with 32.4% and 32.7%, respectively, for the benchmark. Government exposure averaged 44.2% and ended at 44%, versus 67.6% at both the average and quarter-end. Average effective duration was 6.81 years, modestly longer than the benchmark at 6.49 years.
Cash declined from 4% at the beginning of the quarter to 0.3% at quarter end, as capital was redeployed into corporate and government bonds. Within governments, the portfolio remained underweight federal and provincial exposure. By quarter-end, the team described the overall duration stance as neutral after active use of futures and other overlays, while maintaining an overweight to investment-grade corporate debt, an underweight to provincial bonds, long-end inflation-protected securities and fully hedged emerging-market debt from Mexico and Brazil.
Canadian Core Fixed Income posted a negative quarter, as yields rose, and the portfolio modestly underperformed its benchmark. Government and futures positioning contributed, but corporate positioning and currency forwards more than offset those benefits. Within corporate credit, security selection added value, but rate and curve positioning was a larger headwind, leaving the portfolio slightly behind the benchmark.
Mandate: Mackenzie Canadian Core Fixed Income overview
Performance contributors
Government positioning was the largest source of relative value. Underweights to federal, provincial and municipal bonds helped in a quarter when government yields rose, while curve positioning within those sectors also added. Interest-rate futures contributed materially.
Security selection within corporate credit added overall, led by communication and industrial issuers. Bank-loan exposure and cash also made modest positive contributions.
Performance detractors
Corporate positioning was the main detractor, led by infrastructure, financial and energy exposures. The portfolio held substantial overweights in each area, and rate and curve effects outweighed the benefit of comparatively resilient performance and positive selection in parts of the credit portfolio.
Currency-forward positioning detracted from relative performance, while selected long-dated government holdings were pressured by the sell-off. Long-dated Government of Canada and United States Treasury positions, together with selected Quebec and Ontario issues, were among the offsets to the broader benefit from the government underweight.
Total gross returns:
Total return (CAD) | QTD | YTD | 1YR | 3YR | 5YR | SINCE INC. (FEB. 18, 2025) |
MACKENZIE CANADIAN CORE FIXED INCOME | -2.90
| -1.25
|
Mandate positioning
Corporate exposure increased from 54% to 55.4% during the quarter, government exposure rose from 42.3% to 44%, and cash declined from 4% to 0.3%. The portfolio remained materially overweight corporate credit and underweight government bonds. The team ended the quarter with neutral overall duration, an overweight to investment-grade corporate debt and an underweight to provincial bonds.
Looking ahead, the team remains cautious about adding outright duration. Persistent energy-driven inflation, government debt and deficit concerns and continued artificial-intelligence-related issuance are likely to keep the long end volatile. Although higher yields have improved the income available in corporate bonds, tight spreads call for selectivity. The team is emphasizing carry through emerging-market debt and relative-value opportunities, including the widening between U.S. and Canadian yields, rather than broadly extending duration.
Market overview: earnings growth provided a powerful tailwind for equities
The third quarter showed that the current business cycle still has support, but risks have shifted. Growth held up, earnings improved and corporate investment remained firm, but higher oil prices, persistent inflation and rising long-term yields made the path forward less certain. Equities advanced as earnings provided fundamental support, even as higher rates raised the bar for further gains.
Canadian equities benefited from gains in resources and financials. Higher oil prices supported energy, while precious-metals companies were among the strongest performers. Bank earnings were supported by capital-markets activity, trading income and contained credit costs. U.S. equities also advanced, supported by strong earnings and continued technology investment. Higher yields weighed on more rate-sensitive areas.
International markets remained constructive overall, with parts of Asia benefiting from continued demand across the AI technology supply chain. Fixed income faced greater pressure as rising government bond yields outweighed coupon income, while credit remained comparatively resilient. Across markets, the central tension increasingly became earnings strength versus higher inflation and interest rates.
Market outlook: inflation, energy costs pushed long-term yields higher
With the recent earnings strength, the bar for market performance is higher. U.S. valuations are at the upper end of their historical range and have come under pressure from higher bond yields. Investor sentiment points to strong earnings growth going-forward, which could support equities in the near term, but the magnitude of gains may be muted.
The U.S. Federal Reserve and Bank of Canada each face two rate decisions this year, and persistent inflation has shifted central banks toward a tighter policy stance. Long-term yields remain a pressure point for equities, while also improving the income available from bonds.
The U.S. midterms may add to market volatility, but the path forward will be shaped by the economic cycle, inflation and interest rates.
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