While previous Trump tariffs have rarely been implemented as soon as first threatened, trying to anticipate the U.S. president’s policy moves is fraught with risk. Whether the tariffs are implemented on September 1st or delayed, the impact on the U.S. economy, as well as the broader global one, will take months to develop. In the short run, we believe the markets may have overreacted to the tariff announcement.

Looking at economic fundamentals in Canada and the United States, we believe bonds are overvalued. With the yields of all Canada bonds below the inflation rate, investors are simply not receiving an appropriate return. We also believe the Bank of Canada is unlikely to lower its interest rates in the next few months, and that should result in rising yields for short term bonds which in turn will push up longer term yields. Accordingly, we are keeping portfolio durations somewhat shorter than the benchmarks, but due to the ongoing trade uncertainty, we are not placing a large bet on duration at this time. We do not anticipate a recession in the next year or so, so we are comfortable with the current overweight allocation to corporate bonds. However, should yield spreads compress further, we will look for opportunities to take profits in the sector.

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