Navigating North America’s Government Bond Market in 2026: Amid Uncertainty, Opportunity

Navigating North America’s Government Bond Market in 2026: Amid Uncertainty, Opportunity

We believe there are compelling opportunities ahead for fixed income investors despite political and fiscal headlines that may drive short-term volatility. 

The past year has brought a lot of on-again, off-again concern about the global economy, monetary policy and interest rates. When Donald Trump returned as U.S. president in January, markets feared that his mercantilist economic policies would create inflation and push rates higher. Well, by and large, they didn’t (or, at least, they haven’t yet). As for fixed income markets, they remain relatively buoyant and still present a compelling case for investors. Yields are historically high, offering attractive income and some downside protection if rates rise, and bonds’ traditional negative correlation with equities continues to provide meaningful hedge potential against equity risk.

Yet our view is that there is also opportunity, not only risk mitigation, in fixed income markets in 2026. While political and fiscal headlines may drive short-term volatility, other factors—in particular, structural checks within the U.S. Federal Reserve (Fed) and proactive U.S. Treasury measures— may prevent runaway long-end government bond yields. While we expect Canadian government bond yields to remain steady next year, we see more potentially significant opportunities in the U.S.

First, let’s consider the U.S. government bond outlook.

At the beginning of the year, we argued that concerns about inflation and yields in the U.S. were overstated, and we forecast stable or lower yields through 2025, with a year-end target of 4.25% on the 10-year Treasury. Eleven months into the year, the 10-year yield sat at close to 4%.

Today, many market observers believe that long-end yields will rise, even as investors are pricing in three or four Fed interest rate cuts before the end of 2026. Why the disconnect? Largely, it stems about central bank independence and U.S. fiscal deficits. Recent efforts to remove Fed Governor Lisa Cook highlight the administration’s push to influence the Fed. Combined with Trump’s public demands for aggressive interest rate cuts, threats to dismiss Fed Chair Jerome Powell, and the appointment of loyalists like Stephen Miran to the board, these developments have heightened market anxiety that monetary policy could be influenced by politics. Trump will also nominate a new Fed chair before the end of 2025, even though Powell’s term does not officially end until May 2026. Speculation that a Trump ally—such as Kevin Hassett—could take the role has amplified market concerns. The nomination of a chair perceived as politically motivated could initially trigger volatility and a steepening of the yield curve, as markets reassess the risk of aggressive rate cuts.

Interest Rate Expectations in 2026: How Low Can They Go?

Source: Bloomberg LP as of November 10, 2025.

While such moves could spark volatility, we believe concerns are once again overstated. The Fed sets policy by majority vote, not by the chair alone. A dovish chair may influence decisions, but other members of the Federal Open Market Committee can provide an important check against excessive rate cuts. There is also considerable room for interpretation regarding how many cuts are warranted based on economic data, which limits the risk of inflation expectations spiraling out of control. In fact, any spike in long-term yields following a new chair appointment could present a buying opportunity, as markets adjust to how a politically motivated chair fits within the broader decision-making process of the Fed.

Fiscal concerns also weigh on sentiment. The One Big Beautiful Bill (OBBB) Act will make 2017 tax cuts permanent and expand them, reducing revenue. While cost-cutting measures—such as those to Medicaid and social programs—won’t fully offset revenue losses, tariff revenues have helped narrow the deficit in 2025. Case in point: so far this year, higher tariff income has driven an actual decline in the deficit, despite expectations to the contrary. This dynamic illustrates that fiscal risks, while real, may not translate into dramatically higher long-term yields.

Moreover, both the Treasury and Fed have tools to cap long-term yields. Treasury issuance has skewed toward shorter-term T-bills over long bonds, reducing supply at the long end. Buybacks could further support this effort by replacing long-term debt with short-term issuance. Finally, given the likelihood of a Fed leadership aligned with the administration, direct intervention in the bond market cannot be ruled out. The Bank of England’s actions in late 2022—when it bought long bonds to stabilize markets despite ongoing rate hikes—provide a precedent for such measures. This example underscores the reality that central banks in developed markets can act decisively to prevent disorderly moves in yields, even outside traditional monetary policy objectives.

As for Canada, the government bond outlook is much less dynamic. We believe the Bank of Canada (BoC) has completed its interest rate cutting cycle and will remain on hold for the foreseeable future. Governor Tiff Macklem recently signalled that monetary policy cannot offset the impact of U.S. tariffs on the Canadian economy, effectively passing the baton to fiscal policy. Ottawa responded with a stimulative budget, projecting a $78.3-billion deficit (2.3% of GDP) for fiscal year 2025–26. While this provides some support, structural challenges—particularly weak productivity—limit growth prospects. The BoC forecasts real GDP growth of just 1.1% for 2026.

The combination of subdued growth, elevated bond supply to fund deficits, and a steady policy rate suggests Canadian 10- and 30-year yields may remain broadly stable over the coming year. In short, we do not expect significant moves in the long end of the Canadian curve.

So, despite the sometimes-alarming headlines and the political and economic uncertainty that may well lay ahead in 2026, our base case is that the rate environment in both Canada and the U.S. will remain relatively benign. In fact, in the U.S., we are constructive on rates, which suggests that, on the long end of the yield curve at least, there may be potential for capital appreciation and a chance for bonds to deliver more than steady income and an equity hedge for investors.