Market News: Week Ending August 28, 2026

Market News: Week Ending August 28, 2026

Statistics Canada announced that real gross domestic product (GDP) expanded by 3.3% (on an annualized basis) in the second quarter of 2026. This follows a revised 0.3% advance (previously reported as -0.1%) in the first quarter. The positive revision now erases technical recession (two consecutive quarters of negative growth) previously reported for the Canadian economy. The second quarter result for 2026 was considerably stronger than the forecast for a 2.5% advance that was provided by the Bank of Canada in its July Monetary Policy Report. Interestingly, GDP per capita expanded by 3.9% during the second quarter and by 1.3% in the first quarter based on the revision. While on the surface this would be considered good news, part of this shift is due to the ongoing decline in Canada’s population. For the first time since consistent data were made available (1946), Canada’s population has now fallen (on a year over year basis) in two consecutive quarters. A shrinking population is not the preferred method of boosting output per person. On a monthly basis, real GDP by industry rose 0.3% in June, marginally higher than the 0.2% estimate provided as forward guidance by Statistics Canada in the prior data release. Forward guidance for July was also provided in this report and suggests no change in GDP for the month. 

Long-term U.S. Treasury yields have climbed to their highest levels in nearly two decades. The recent surge in the U.S. 30-year yield cannot be pinned on a single factor. Instead, it stems from a confluence of persistent inflation, structural government deficits, resilient economic growth, and challenging supply-demand dynamics—namely, fewer buyers available to absorb a steadily growing volume of government debt.

1. More Government Bonds to Go Around

High government spending is no longer an anomaly; it has become standard practice across many developed economies.

Broad-Based Deficits: Fiscal deficits remain large, persistent, and broad-based. While drivers vary by country, the overarching trend is consistent: heightened spending on defense, infrastructure, energy security, and industrial policy.

Market Impact: For bond investors, the underlying policy motivations matter far less than the end result: an ever-increasing supply of government bonds that the market must somehow absorb.

Debt Projections: U.S. federal debt held by the public is on track to continue rising significantly, projected by the CBO to reach up to 175% of GDP in the coming decades.

2. Fewer Buyers of Government Debt

As bond issuance expands, traditional sources of demand are weakening:

Central Bank Balance Sheets: Central banks are no longer expanding balance sheets by purchasing duration.

Foreign & Trading Demand: Foreign official demand is less robust than in prior years, and momentum in the hedge fund basis trade has slowed.

Corporate Competition: High corporate debt issuance—particularly from AI "hyperscalers"—is drawing capital away from long-dated government debt. Capital flowing into long-dated Investment Grade (IG) corporate bonds is money redirected from Treasuries.

3. Growth, Productivity, and Sticky Inflation

Fundamental economic conditions are providing additional upward pressure on yields:

Resilient Growth: Supported by the AI capital expenditure boom and expansionary fiscal policy, steady economic activity suggests current interest rates may not be overly restrictive, potentially keeping yields elevated for longer.

Persistent Inflation: U.S. inflation has remained above target for nearly five years. If monetary policy remains insufficiently restrictive, persistent inflation will continue to erode the real value of future cash flows, reducing the overall attractiveness of long-term debt.

4. Policy Interventions: A Temporary Cap?

Faced with rising risk premiums, policymakers are beginning to respond:

Treasury Buybacks: The U.S. Treasury announced a doubling of long-term bond buybacks. This action is expected to reduce the market supply of 20- and 30-year bonds by approximately 14% to 16%.

Historical Context: Similar interventions in countries like Japan and the UK initially stabilized markets, but yields eventually resumed their upward trend once fundamental economic forces reasserted themselves.

Near-Term vs. Medium-Term Outlook: While recent Treasury actions may temporarily cap long-end yields and reduce rate volatility in the short term, lasting relief for long-term bonds will require renewed confidence in inflation control, stronger investor demand, or a slowdown in economic growth.

The Bottom Line

With a growing supply of government debt, sticky inflation, and reduced buyer participation, investors now demand greater compensation to hold long-term bonds. While markets will always clear, they will do so at higher yields to account for this elevated risk premium.

Note:
All index performance is in Canadian dollars.

IMPORTANT DISCLAIMERS
The information in this letter is derived from various sources, including CI Global Asset Management, CRA, Bloomberg, National Post, Globe and Mail, Wall Street Journal, Bloomberg, Reuters, Investment Executive, Advisor.ca, MarketWatch, Toronto Sun, The Guardian, MSN.ca and Statistics Canada at various dates. This material is provided for general information and is subject to change without notice. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances. Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Global Asset Management has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.