“But you have an interesting situation that doesn’t make a lot of sense to me: bond spreads are pretty tight in Canada, almost as tight as US spreads. You have a US economy that is growing at a faster pace, but the compensation for risk is the same from a spread standpoint.”
Despite the uncertainty and liquidity issues that could inform those tight US bond spreads, Tabet notes the bond market has so far treated the US relatively kindly, despite additions to the US deficit in the Big Beautiful Bill. He notes that US debt to GDP, despite being around 120 per cent, is still nowhere near as high as some other developed economies — like Japan at 260 per cent.
Tariffs, too, are having some of their desired impact on US deficits. Looking at tariff incomes just for May, Tabet notes that the United States took in $22 billion in additional monthly tariff revenue. Projected out, that revenue can cover most of the deficit additions in the Big Beautiful Bill. At the moment, markets are taking those numbers onboard and bond vigilantes aren’t pushing up the yield of the 10 year US treasury.
While there has not been a bond market apocalypse in the same vein as Liz Truss’ disastrous 2022 mini budget, the ongoing uncertainty around sovereign debt and global economic forecasts have made some analysts predict less stable return profiles from traditional government bonds. Those predictions may have advisors looking more closely at the corporate bond market. Tabet notes that as corporate credit can often have equity-like behaviour it does not necessarily offer the same non-correlated returns profile that some investors seek from government debt. That said, he notes there may be some significant areas of opportunity in the right subsets of corporate debt.
Advisors, Tabet notes, must grapple with the sheer scale of the corporate bond market as they seek areas of wider spread to capitalize on. In Canada alone there are about 250 public corporate debt issuers. Globally, there are over 10,000. Canadian corporate bonds tend to come from three sectors: financials, energy, and utilities. Those three sectors are already somewhat interconnected given how much money Canadian financials lend to the energy sector which, in turn, supplies the utilities sector. More broadly, Tabet believes that in the context of a slowing economy the Canadian corporate debt market is expensive and at risk of widening spreads, which would negatively impact prices.
