The curve

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  By Guest Blogger Scott Booth

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It is a busy week for central bankers.

Odds are the Bank of Canada (BoC) will hike 25 basis points on Wednesday, as BoC Governor Tiff reckons with data pulling in two directions: September CPI came in hot at 3.1%, while the economy lost about 68,000 jobs and unemployment is 6.5%. Chilly.

The Fed is expected to sit on its hands.

Regardless of the action taken tomorrow, Mr. Market says more hikes are coming. The 2-year Government of Canada yield sits around 3.4%, roughly a full percentage point above the overnight rate today. It is usually a good predictor for the path of interest policy.

Regarding the bond market, it has been a rough year fixed income investors as prices have fallen and yields have moved upwards in dramatic fashion.

The U.S. Treasury yield curve and Government of Canada (GoC) yields have shifted up materially since the beginning of the conflict in the gulf, which has proven to be a significant inflection point.

The table below illustrates the magnitude of these moves at different maturities along the yield curve.

U.S. Treasury Changes in Yields Across the Curve Since Start of Iran Conflict

Source: FactSet, Turner Investments, October 26, 2026.

U.S. Treasury yields rose aggressively between February 27, 2026, and October 26, 2026. Over this period, the yield curve transitioned out of its multi-year inversion into a steeper, normally sloped upward path.

The largest yield increase occurred in belly of the curve, and the benchmark 10-year yield has jumped more than 1%, pushing through the high-water mark established at the end of the last tightening cycle, reflecting persistent fears of fiscal irresponsibility, government debt supply, inflation expectations, and strong capital demand. Unnecessary wars, be they kinetic or trade related, have charged inflationary pressures. Governments are spending aggressively and borrowing a bunch to do so. The A.I. buildout is competing for investment dollars.

With these conditions as a backdrop, Indexed Canadian investors in the fixed-income space have eked out small positive total returns year-to-date (YTD), with cash equivalents like T-bills and HISA s preserving value and making some nominal headway. Floating-rate debt has kept its head above water, and securities offering inflation protection like TIPS and real-return bonds have fared OK too.

Generally, short duration assets and those offering inflation protection have been able to tread water. Other than that, it has been a tough slog.

So, let s talk about Duration.

It s an important concept and key metric in bond portfolio management.

Duration measures a portfolio s sensitivity to changes in the rate environment, capturing the percentage change in portfolio value for a 1% change in interest rates.

All else being equal, duration increases as the term to maturity of a bond gets longer.

Click to enlarge

Understanding of the duration of your fixed income portfolio can be a good tool for predicting how it will react as rates move around.

At present, the path of least resistance for rates seems to be higher but who knows for certain?
How can investors manage in this environment of interest-rate volatility?

Here we circle back around to that concept regularly espoused in the house that Garth built.
Diversity.

No need to make a big bet in uncertain times. Have little of everything. If you ever need to raise some funds, you re apt to have something in your portfolio that is fairly and fully valued to sell.
Some prudent ideas:

Shorten the dial. One can find attractive yields in the three-to-five-year range, get paid reasonably well and expect limited damage from an upside surprise in rates. No need to chase yield out the curve.

Match dates for near-term needs. Money needed in a year or two belongs in cash-like holdings or a short ladder, something that is unlikely to be underwater when you need it.

Keep some ballast. A small slice of high quality, longer duration assets. This tranche is more volatile but should afford your portfolio some lift if the economy rolls over, markets go risk-off and rates fall quickly.

Consider inflation protection. Treasury Inflation Protected Securities (TIPS) or Real Return Bonds could fare better if inflation is likely to remain a contributing factor for rising yields.
That brings us to the choice between owning bonds and owning a fund/ETF.

An individual bond has a maturity date. Hold it to maturity and default risks aside (no CCC rated AI names for this), you know what you’ll get. The price wobbles along the way, but it is pulled back toward par as that maturity date approaches.

A bond fund or ETF never matures. The manager keeps rolling the portfolio as maturing holdings get reinvested at prevailing rates. That gives you diversification, liquidity and low cost, but no date on which your principal comes home. If yields rise, the fund’s price falls and stays lower until the higher-yielding bonds it buys make up the difference. It s kind of like a rolling ladder.

Neither is better. It really depends on individual needs and what one is looking to solve for.
Individual bonds or a ladder to a given maturity date can suit to cover a known liability: a hefty tuition bill, the purchase of a house or cottage, or a mid-life-crisis inspired 911 GT3.

Funds suit ongoing, diversified exposure where cash isn t needed for a particular date.

Looking out over the next year or so, expectations are for 3-4 rate hikes from policy makers on either side of the border and across most of the developed world. How that translates as one moves out the yield curve is tough to predict, but the yields currently on offer are higher than they have been in recent memory. A steep yield curve means one needn t take on too much duration to get some decent yield.

Scott Booth, CFA, is a seasoned financial advisor and licensed portfolio manager. Over the past 18 years he has worked in the capital markets as an analyst, trader and advisor with major banks and now with Turner Investments.

Source: https://www.greaterfool.ca/2026/10/27/the-curve/