Q1 2026 Fund Commentary

Commentary and opinions are provided by Canada Life.

Market commentary

On a net basis, yields moved higher during the first quarter. Yields fell through the month of February but rebounded and reached year-to-date highs in March after the beginning of the conflict in the Middle East. Gross domestic product came in better than expected, although there was some weakness in employment numbers. Inflation information is only available through February and had been moderating.

The Bank of Canada (BoC) met twice during the quarter and left rates unchanged at 2.25%. At the March meeting, the BoC highlighted it would be monitoring the geopolitical situation closely and stands ready to respond as required. The U.S. Federal Reserve Board (Fed) cut rates at its January meeting, leaving the overnight rate at 3.50%. In March, the Fed held rates steady, with the geopolitical situation presenting conflicting impacts on both elements of the committee's dual mandate: potential for lower growth and higher inflation. Both headline and core inflation have started to migrate lower, closer to the 2% mid-point of the target band, although March data isn't yet available and may reflect the impacts of higher oil prices.

Performance

The Fund’s duration positioning contributed to performance during the first quarter. The sub-advisor increased the Fund's duration through to the end of February as yields were falling, which contributed to performance during that period.

Carleton University (3.264% due 2061) contributed to performance. The sub-advisor holds an overweight allocation to this bond, which outperformed Ontario bonds as a whole and provincial bonds overall during the quarter.

Selection within corporate bonds detracted from performance. Losses were focused in the communications and infrastructure subsectors. Within the infrastructure subsector, the sub-advisor held more liquid issuers, and during times of spread widening, these securities are typically the first to experience the spread impacts.

407 International Inc. (4.89% due 2054) detracted from performance. The sub-advisor held an overweight allocation to this bond, which underperformed the average Highway 407 bond and the average infrastructure bond within the long-term index.

Portfolio activity

The sub-advisor added a Highway 407 10-year bond at new issue during the quarter. The issuer launched both 10-year and 30-year bonds, and the sub-advisor participated in the shorter deal given the uncertainty in the credit market because of the ongoing geopolitical situation.

The sub-advisor increased the allocation to Province of Quebec bonds over the course of the quarter. The sub-advisor had held an underweight allocation to Province of Quebec bonds because of spread volatility related to political uncertainty. Spreads have begun to stabilize and provided a good entry point.

The sub-advisor sold corporate holdings, largely in the retail space, that were no longer index-eligible and replaced them with longer-dated assets. The sub-advisor also reduced a line of Labrador Island Link bonds to provide more liquidity to the Fund.

Outlook

Going into the second quarter, the sub-advisor has reduced corporate exposure in the Fund because of continued uncertainty in the geopolitical situation. The sub-advisor remains overweight corporates but has room to add at more attractive spread levels. Given the ongoing uncertainty globally, the sub-advisor remains slightly long duration and positioned for ongoing yield curve flattening. With continued elevated government issuance requirements, the sub-advisor is monitoring the impact on provincial spreads and the effects of federal government adjustments to issuance distribution.