Q1 2026 Fund Commentary

Commentary and opinions are provided by TD Asset Management Inc..

Market commentary

The first quarter of 2026 was marked by elevated volatility, driven by shifting macroeconomic expectations and rising geopolitical uncertainty. Canadian inflation decelerated, with headline consumer price index growth falling below the Bank of Canada’s (BoC) 2% target. Labour market conditions remained weak, with the unemployment rate rising. This combination of subdued inflation and a weakening labour market would ordinarily support the case for further monetary policy easing. However, the escalation of conflict in the Middle East, the disruption to shipping through the Strait of Hormuz and the resulting effects on global supply complicated the outlook for monetary policy.

The BoC held its policy interest rate unchanged at 2.25% during the quarter. Policymakers noted that before the supply shock, the balance of risks had favoured additional monetary easing. The Canadian economy’s weak starting point, combined with a moderate inflation backdrop, provides the BoC with flexibility to assess the impact of the supply disruption before adjusting policy further.

Canadian government bond yields ended the volatile quarter higher. Shorter-term yields rose more than longer-term yields, resulting in a flattening of the yield curve. Yields initially declined during a risk-off rally in February but reversed sharply following the escalation of geopolitical tensions, as markets reassessed risks from supply-side disruptions.

Corporate bond spreads widened modestly during the quarter. The relative stability of spreads reflected the strength of corporate fundamentals and continued demand for income-generating assets amid elevated volatility.

Performance

The Fund is a passive index strategy designed to track a broad Canadian bond index while excluding lower-rated corporate bonds at the time of purchase. Individual security-level and factor-level attribution isn’t applicable for a passive strategy. The Fund’s exclusion of lower-rated corporate bonds, which performed well relative to the broader index during the quarter, accounted for the tracking difference.

Portfolio activity

As a passive index strategy, the sub-advisor doesn’t make active security selection or positioning decisions for the Fund’s portfolio. Portfolio changes are driven by index rebalancing.

Outlook

In the sub-advisor’s view, the balance of risks remains nuanced amid a complex macroeconomic backdrop. Signs of labour market softening in the U.S. contrast with higher near-term inflation expectations from geopolitical disruptions. In Canada, economic weakness provides the BoC with flexibility to remain on hold regarding interest-rate changes as it assesses the domestic effects of elevated global uncertainty, including upcoming trade negotiations. From a corporate bond perspective, sector and issuer dispersion may continue to be a factor amid elevated macroeconomic and geopolitical uncertainty.