Higher rates and a shifting trade picture
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With autumn leaves crackling and the heat of summer fading, we find ourselves closing out a quarter that delivered steady results despite a steady stream of economic and geopolitical challenges. While stock markets have continued to move higher, the investment landscape continues to evolve, shaped by rising bond yields, shifting central bank policy, and ongoing geopolitical tensions.
The months ahead may bring new challenges and opportunities, making this a timely moment to review your financial strategy and ensure it remains aligned with your long-term goals.
Bond yields rise
A defining story in both the quarter and the year so far has been the rise in government bond yields, particularly in the United States. During the quarter, the 10-year U.S. Treasury yield pushed above 5% to levels not seen since the Global Financial Crisis. Long-dated yields in Germany and Japan are also at multidecade highs. Sticky inflation, higher policy rates, and concerns about government debt have contributed to the rise in yields. While higher yields have weighed on bond prices, they've also created more attractive opportunities for new investors.
In Canada, the 10-year government bond yield ended the quarter just below 4%, with strong foreign demand helping keep yields lower. Statistics Canada reported that foreign investors have purchased an unprecedented $104 billion of Government of Canada bonds so far this year.
Global central banks signalled a more hawkish stance during the quarter. In September, the U.S. Federal Reserve (Fed) raised rates by 25 basis points to 3.75%–4.00%, its first hike since 2023, as Fed Chair Kevin Warsh cited inflation that's “too high and has been for too long.” The European Central Bank made a similar move, while the Bank of Japan hiked rates to 1.25%. Despite the inflation concerns, we expect any further policy tightening to be relatively limited and gradual. For its part, the Bank of Canada (BoC) held its policy rate at 2.25% in September, citing stronger growth but higher inflation risks.
Trade talks break down
The Bank of Canada also pointed to uncertainty stemming from Canada-U.S. trade tensions. Trade negotiations broke down during the quarter, leading to new U.S. tariffs and Canadian countermeasures. While the situation remains fluid, prolonged tensions could weigh on business investment and contribute to higher consumer prices over time. Prime Minister Mark Carney has also been working to diversify Canada’s trade relationships. In September, he said Canada would pursue a security and economic alliance with the European Union, which is already Canada’s second-largest trading partner.
Despite higher interest rates, corporate earnings remained strong, with most S&P 500 companies beating expectations. Demand for AI infrastructure continued to drive investment, although chip shortages and AI safety concerns could temper future growth.
I hope you’re all enjoying the cooler air and colours of autumn.
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