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Michael Miranda:
Welcome to Beyond the Portfolio, the podcast where we take you inside the thinking that shapes today's markets and tomorrow's opportunities. I'm Mike Miranda. Today is November 6th, and we're kicking off our 2026 outlook series, the first of four special episodes where we'll explore what's ahead across the investment landscape. Over the coming weeks, we'll dive into private markets and alternatives, equities, and wrap up with our capital market assumptions and key themes for 2026.
We begin today with fixed income and credit, an area that's once again front and center for investors as central banks shift gears and markets recalibrate. Joining me are Dan Phillips, chief Investment Officer for BMO US Wealth, and Richard Belley, fixed income strategist with BMO Nesbitt Burns. We'll unpack the Fed's latest decisions, the Bank of Canada's policy path, and what all this means for yields credit spreads and sector opportunities heading into the new year.
Dan, let's start with you. The Fed cut rates again last week after restarting its rate campaign at their September meeting, but threw some cold water on the high expectations for another cut in December. How are we interpreting the Fed's recent action, versus Powell's commentary, as it relates to the 2026 outlook?
Dan Phillips:
Yeah, definitely, Powell threw some cold water on the December rate cut expectations, which had gotten to about a hundred percent, according to the market odds. So pretty much priced in, and now those market odds sit more at 70%, so it's come back a little bit from a near certainty. But it's now on the markets to really understand and analyze whether or not those comments were really around inflation concerns, or was it some hint of Powell trying to maintain the independence of the Central Bank, in other words, saying that the president doesn't decide when we've cut rates, it's up to us to decide that.
We still believe we're going to get a rate cut in December. The jobs market is still weak. We haven't had any government data, of course, but we did get just recently a report out from the consulting firm Challenger Gray in Christmas, which showed that October had a total of 150,000 layoffs. It was the highest amount for the month of October, going back over 20 years, back to 2003. And so, that helps to validate the recent shift in the Fed's focus to its full employment mandate, co-mandate, along with its inflation mandate, price stability mandate, and supports our view that we'll probably get another rate cut at the final meeting in 2025, in December.
Now, for 2026, I think the markets are fairly in agreement that the goal is to get to the so-called neutral rate, I.E. the rate which the Fed is neither accommodative nor restrictive as it relates to economic activity. The question, however, is what is that rate? For the longest time, that rate was viewed to be more or less, it can fluctuate, but more or less at 3%. More recently, however, there's been new thinking, specifically from the newest member of the FOMC, the Fed's policy-setting committee, Governor Stephen Moran, appointed by Trump, who thinks that rate is more like 2%.
And so, two camps within the Fed have really started to form around those who think that we are pretty close to the end of rate cutting, because we're getting closer to that neutral, that legacy neutral rate, versus those who think that even if they cut a few more times, they will still be restrictive based on this new calculation around what that new neutral rate is.
Also to be factored in as we head into 2026 will be the fact that every year, four bank presidents, there's 12 regional banks, of those bank presidents, four are rotated on as voting members in the Fed's policy-setting committee, and four rotate off. And when you look at the reputation and rhetoric from those coming onto the committee and coming off, it leans and it will be a little bit more dovish, just slightly more dovish, in terms of the Fed member composition next year.
And then, of course, Powell's term does end in May next year, which means of the eight meetings that the Fed has a year, three of them will have Powell at the helm, whereas five of them will have the new guy, whoever that new guy may be. The administration has put out a number of options, about five different potential candidates, that are all dovish, but to varying degrees. And so, that will also play a big part in determining what the Fed's ultimate trajectory is next year. And we've been told that we're going to get that announcement of who the nominee will be by the end of the year. If we actually get it by the end of the year, we shall see. But hopefully we do, and then we'll have a much better sense as we go into 2026 as to how much and how many more rate cuts we will get.
Michael Miranda:
All right. Thanks, Dan. That's very, very helpful, Certainly as it relates to the evolution through the rest of '25 and the composition of '26. A lot of your comments were about rates. Maybe let's stick with the Fed and also think about quantitative tightening. So the Fed also announced that they're ending quantitative tightening. What impact could this have on the markets going forward?
Dan Phillips:
Yeah, so as many may know, the Fed, one of their tools in their toolbox that they had been using to a great extent ever since the financial crisis is quantitative easing, the purchase treasuries on the open market, and mortgage-backed securities, which was a way to put more liquidity into the system back when the concern was that inflation was too low, below their 2% target.
Since then, they've gone to the opposite, quantitative tightening, which means that the treasuries and mortgage-backed securities they hold on their balance sheet, when they matured, or when the coupons were paid, instead of reinvesting into the market, they were just letting it roll off, which was draining the system of some of the demand for treasuries, most recently to the tune of $40 billion a month. And if you annualize that, that was about 2% of the total US treasury debt outstanding, which is around $30 trillion. And the ultimate impact of that was that whatever the Fed wasn't buying, the markets had to buy, and that was, of course, taking liquidity from other purchases, such as going out the credit spectrum or going into equities, ultimately, when you think about the entire markets.
And as of December 1, so a little bit under a month from now, they're going to stop doing that quantitative tightening. They're not going to let those proceeds roll off their balance sheet, they're going to reinvest them into the treasury market. And so again, that's effectively 2% greater demand than was there before. It's not huge, but it's also not insignificant at all, and could have a bit of an impact in terms of the liquidity, and when there's more demand for treasuries, the markets will potentially go out the risk spectrum and find other things to buy. And so, that's the real impact on the markets, is the way in which it can provide more market support, more liquidity, more dry powder, if you will, to go into financial assets.
Now, the last thing that's important here, I think, is the way in which this will combine with the end of the government shutdown, whenever we may get that. Hopefully it's sooner than later. We certainly hope it's before the Thanksgiving holiday for those in the US here, for travel reasons. But when that does end, when the government shutdown does end, that'll also put more liquidity in the system, because right now, the Treasury is still issuing debt. So it's still taking liquidity out of the system, generally for the purposes, of course, of paying workers and other government contracts, et cetera.
So they're issuing debt, but they're not spending the money, and when they spend the money, that money finds its way back into the banks ,because when people get their paychecks, they go into their bank accounts. As such, banks are losing some of the liquidity they once had, because they're no longer seeing that money come in. That's creating a bit of a liquidity crunch. That will be alleviated when the government opens again, the money starts flowing back out, the bank's coffers get filled back up.
And so, that will be sort of a one-two punch when combined with the end of the QT, that could have some impact on markets. We have a little bit more demand to markets, certainly will support markets a little bit as well. So that is both the QT ending and getting the government back up and running will have impacts on the market, and something to look to watch out for.
Michael Miranda:
All right, let's bring in Richard, then. Richard, the Bank of Canada has also cut rates in its last two meetings, but it currently sits at 2.25% versus the Fed at 4%. From your perspective, how many more rate cuts does the Bank of Canada have in them, and then what do you expect the trajectory to be as we head into 2026?
Richard Belley:
Thanks, Mike. Yeah, with this last decision the Bank of Canada rate sits well below the Federal Reserve rates of 4%. But more importantly, with that last decision, the Bank has now cut rates by a total of 275 basis point since starting last June, 2024. And when we compare this to the US, the Bank started earlier, at three months earlier, and was way more aggressive with these cuts. And also, as Dan just alluded to the end of QT in December by the Fed, the Bank of Canada ended the QT program back in January.
So a lot have been done, and some of the reason that supported these actions has been not only the fact that inflation faded more quickly on this side of the border, but more importantly, what we saw, especially in 2025, is that the potential economic headwind that came with the trade uncertainties. It did provide the Bank with more flexibility to act more decisively and quicker.
If we're looking forward to try and figure out a potential path, our view is that the Bank is likely close, if not at the end of the easing cycles. We think the Bank has already done a lot and these cuts will need some time to start having an impact on the economy. So there is, in our opinion, limited scope for more rate cuts in the near future, and especially in 2026. Our economists did pencil in the potential for one more rate cut for early 2026, and that is, if we see the recent weakness in GDP numbers and labor trends that we saw at the end of the summer, would persist. But more importantly, what we would need to see for the Bank of Canada to act is more friendly inflation trends in the next couple of months, some things that we haven't seen since the middle of summer.
So overall, I think that for the moment, we believe the bank is done. 50/50% chances of one more rate cut in early 2026. And when we're looking at the market expectations currently, it's almost in line, but the market is looking towards more of the first half 2026, where the bank could need to come back.
So let me just take a step back just for a second and just look at why do we think, at this point, despite the fact that the economic growth is not necessarily looking positively, and inflation could still be a risk, why do we think that ultimately, the Bank could be done? First, there's the obvious. At the last meeting in October, the bank's message was more hawkish in general, and they stated that their outlook, which is still fairly conservative when you compare it to street economists and our own economists, fairly conservative, they stated that there's no further stimulus that would be needed, assuming we continued on this path. So that was effectively closing the door for a December cut, and it confirmed that the data at this point would need to deteriorate significantly for a butter cut to be made in 2026.
Second, with this last cut, and Dan was talking about the range for the Fed and which level they would be, and there's a debate about which neutral rate would be. In Canada, the range is expected to be between 2.25 and 3.25. And with that last cut is basically, we're reaching the bono of that range. So we're below the midpoint, and most likely the policy is already accommodative to the economy.
Third, and we need to remember this, there are limits to what the monetary policy can achieve. And because most of the recent weakness we've experienced in 2025, in GDP and the labor markets and unemployment rates moving higher, can be linked to the tariffs and the trade uncertainties. And honestly, the Bank cannot target affected sectors with lower rates. And to be honest, it's something that we may have to repeat ourselves a couple of times, I don't think the Bank has the appetite to go back to previous crisis stimulus to try to drive this economy forward. So I think that the Bank will have a limited scope and limited interest to move rates much lower.
And finally, the liberal government in Canada tabled it's budget this week. It is not approved yet because it's a minority government, but assuming it is approved, what we would see for Canada is a relatively high deficit, pro-growth policies. That, when combined with a monetary policy that tends to work with a lag, there are stronger arguments for the Bank of Canada to pause, to be sidelined, and to let the stimulus sink in. So overall, what we're looking for is the Bank of Canada close to the end, with the potential 50/50% potential of one more rate cut that would come in the first half of 2026.
Michael Miranda:
All right, thanks, Richard. Very, very helpful to know kind of where we're thinking, the Bank of Canada is pretty much close to the end on its rate cutting campaign. So maybe back to Dan, let's think about the Fed, then, for a moment. How many more rate cuts do we expect coming out of the Fed? Will they get down to the same levels that the Bank of Canada finds itself at right now?
Dan Phillips:
Yeah, so assuming we do get the December rate cut, the markets believe that there is maybe two or three rate cuts destined for 2026, as priced by what's called the Fed Funds Futures. And that would take us right to that 3% legacy neutral rate, as I discussed earlier.
We think that they may go a bit further. As I mentioned, we will have a slightly different Fed voting member composition going into 2026, slightly more dovish. And then importantly, we will get the new Fed chair, who will certainly be more amenable to rate cuts, coming in in May. And so for us, we think that four rate cuts next year is the most likely sort of base case expectation. And that would be basically cutting once every other meeting. There's eight Fed meetings in a year. And that would take us down to either 2.75% or 2.5% on the federal funds rate.
So, still above Canada, as Rich mentioned, we will be closer. They're either going to be at sort of that 2.25 to 2%, still a little bit above that. But I think the larger point to make on the sort of what we'd call the lower bound is that it's not going back to zero, as we saw coming out of the financial crisis, and then again as the policymakers dealt with COVID. I think they've appreciated that the logistical problems that a 0% rate causes was not worth the modest incremental benefit of going, say, below a 1% level, going all the way to zero. So I think that the lower bound is a little bit higher these days, and as it relates to where the Fed is going to end up, probably more like, at most, sort of a 2.5% type level, which would be about 1.5% lower than where we sit today.
Michael Miranda:
All right, thank you both on that. So I think it's very helpful, especially as our clients think about where short-term interest rates are going to be. Obviously we're sitting here talking about the overnight rates for the Bank of Canada and the Federal Reserve, but that certainly has a pretty good impact on front-end interest rates. So let's broaden our focus out a bit and maybe talk about the rest of the interest rate curve, and we'll come back to Richard on this one. Richard, the 10-year US yield right now is just a bit over 4%, about the same as the current Fed policy, while the Canadian 10-year is closer to 3%, about 1% higher than the Bank of Canada policy rate, meaning that Canada has a bit steeper yield curve than the US. So maybe from your perspective, what does this tell us, and how do we expect the US and the Canadian yield curves to evolve in 2026?
Richard Belley:
So as you mentioned, it's like we're already looking at a relatively steeper curve in Canada, but what we need to remember is the Canadian economy. We're looking in the last 12 months, been running at about half the speed of the US, and our inflation is closer to 2%, compared to 3% for the US at this moment. So it helps explain why our rates across the yield curves are closer, and that different spread you noted between the policy rate and the 10-year yields reflects the fact that the Fed and the Bank of Canada are currently at different stages in their respective easing cycle, with the Fed still in restrictive territory.
And just to give some perspective about the steepening trends that we see during the easing cycle, historically, the yield curve will tend to steepen significantly as Central Bank eases policy. It's like what we see is basically short-term yields, and like Dan was alluding to it, the potential of four rate cuts in 2026 will drive those lower yields, the lower declining faster, most likely, than long-term rates, leading to steeper yield curve.
If we're looking at the past four to five easing cycles, on both sides of the border, what we have seen on average is more than 200 basis point of steepening over the cycle, if not, in some cases, more than 350 basis point. So based on this, there is certainly room for more steepening, especially the US, where you're looking at that curve, that overnight 10-year yield curve to be currently flat compared to the Canadian curve.
So we need to objectively keep in mind that when we're looking at past cycles, they were not necessarily the same. It may be more difficult to make comparison. The level of interest rates were different. The level of inversion in the yield curve, where short-term yields were higher than long-term yields, where the inversion was different. And there were also different reasons supporting the easing cycles that we've seen them. So comparison may be a bit more difficult. But in our opinion, and considering the fact that especially in the US, that what we're looking for is still a gradual return towards the neutral rate in the States, that ultimately the trend in 2026 would be for a steeper yield curve.
When we're looking at Canada, and I'm going to touch on a regional forecast in a second, but when I'm looking at Canada, we also have to remember that the road travel already in 2025 has been relatively long, so the bulk of the steepening may be behind us, and ultimately, from that point of view, the steepening trait is going to be more important in the US. So now, looking more from a regional perspective, just looking at the US first to start, without repeating what Dan said, we're looking at potentially four rate cuts in 2026. The bias remains for those short-term rates to decline from where we are at this point.
Now, the question is about long-term rates. What could we expect from the 10-year sector? And to be honest, clearly, we've seen a range in 2025 that would've been at a higher level of 4.75, lower level, around 4%. Briefly touching on the four. So looking forward, is there potential for ten-year yields to move lower than 4%? There is definitely that possibility.
In our opinion, we still think that it's difficult with the current environment to see ten-year treasury yields moving a lot lower than 4%, and there's a couple of reasons for that. First of all, we can think of the fact that inflation remains above target and may still be there for a bit longer. The fiscal policy, a rising deficit and debt could ultimately have an impact, especially at the longer end of the yield curve. At least this, historically speaking, is something that we have experienced.
And overall, there are some economic policy uncertainty and general risk. Ultimately that could limit the potential for ten-year yields to trade much lower than 4%. But having said that, we understand, and normally lower central bank policy rates will have a tendency in the near term to drive interest rates across the yield curve lower.
Overall, if we're looking from an overall call forecast for 2026, we still think that the curve's going to be steeper. It's going to be much closer, if not steeper than we are currently seeing in Canada, and that would be from the perspective of a more aggressive Fed in 2026 than the Bank of Canada.
Like any forecast, there's always a question mark about the risks that this forecast may not materialize. One of these risks, and I don't want to spend too much time on this, is the fact that what we've seen is the debt management supply being a bit different than what we could have expected normally. As the old saying, "Debt does not matter until it does." Currently, it doesn't, and one of the reason it doesn't is what we've seen is, despite the larger deficits currently, the funding gap has been done in the short term part of the yield curve, in the treasury bills, and it had no impact so far on the long-term bond notes and bonds issuance in the treasury world. And the Treasury Department has basically been clear that for a moment they do not foresee any changes in the near term, and especially for the first half of 2026.
So chances are, there may not be any pressure at the longer end of the yield curve from that point of view. And at the same time, they said that potentially, if they're restarting or increasing bond issuances at the longer end of the yield curve, they may focus more on the five-year, like the three- to seven-year sector of the yield curve. Again, not putting upward pressure on long-term yield. So while we still see that steepening the yield curve, if we compare it to previous cycles, we may not see the same extent of the steepness that we could have in normal easing cycle.
As for Canada, Mike, as you said, this has probably already widened to close to 100 basis point, and it reflects the more aggressive cuts. For 2026, we see the bias to remain for further steepening, but this will not be a straight road, and the move will likely be a lot more muted than what we have experienced so far this year. With a 50/50 chance of one more rate cut, there is limited potential for lower short-term rate yields, so the steepness would come from the longer end of the yield curve, and that objectively would lead with a surprise economic growth or surprise inflation numbers.
For the moment, we see that temporary, we could see the 10-year yields dropping below 3%, but our range, our forecast for 2026 would be for 10-year yields to be between three and 3.5%. Unlike the US, Canada still faces a fiscal risk and higher debt moving into 2026, but this is not a supply story for Canada for two reason. I said before, QT in Canada ended in January, so there's basically going to be a stronger demand overall to rebuild that balance sheet. And the second reason is that ultimately, it was expected earlier this year, the deficit would be much larger, and issuances has already increased in Canada, so the curve has already adjusted to that reality.
Michael Miranda:
All right, thanks for that, Richard. Good perspective on where we expect the back end of the curve, after having discussed policy rates, certainly the outset for the Fed and the Bank of Canada. Dan, maybe back to you. So Richard just laid out a pretty clear interest rate outlook for both the US and Canada. What does that mean for high yield markets? What's our outlook there, as well as other credit-sensitive asset classes, such as bank loans?
Dan Phillips:
Yeah, definitely. So, carrying on with some of Richard's comments as it relates to how the back end of the curve will behave based on more rate cuts, which we do expect over the next year, it will really hinge on whether or not inflation can remain sort of at its steady state, which effectively has seen about a 3% cap on inflation. If it stays there, as long as it doesn't go higher than that, we could see the back end come down a little bit. But to Richard's point, there's a lot of offsetting impacts there. I think the important point, however, is that we probably won't see rates at the back end, I.E. the 10-year Treasury yield go too much higher from here.
And all said, if you look at the overall yield curve and the shift, especially in the shorter end of the curve, the fact that the Fed will be cutting probably a few more times, that will have some impact on the credit markets, the high yield market specifically, but that impact is more technical than fundamental. By technical, we mean it will impact sort of the supply and demand within the markets. There will be more demand for higher risk asset classes, fixed income asset classes like high yield, to get the yield that the investors would like. As the front end income comes down, moving out duration, but also moving out in terms of taking on more credit risk.
So there will be some of that technical impact, but perhaps not a ton of fundamental impact, as it relates to the view of the quality of the high yield index. For instance, high yield is more so priced on that credit risk. It's not really priced on interest rate risk. It's more of a risk asset. In fact, we group the high yield asset class and bank loans, which we'll come to in a little bit here, in that risk asset bucket. And generally what happens is, when rates come down, it's generally a sign of greater stress in the markets, and when rates go up, it's because of higher inflation or because of better fundamentals. Either way, that's good for high yield. And so, that credit spread will offset the change in interest rates.
All that said, looking forward over the next year for high yield, we still do have an economic growth environment that's pretty good, despite the fact that the Fed is focused more on the labor markets, and the labor markets have shown weakness. The broader economy continues to do all right, a 3% growth level. It's the K-shaped economy, as you hear a lot about, where perhaps on the consumer side and the labor markets being a little weaker, but the broader economy continuing to push forward, and then you've got that 3% inflation rate.
And so, that's not a terrible backdrop for high yield, because when inflation is a bit higher, it's easier to pay off debt, and then when growth is still good, it's easier to meet those debt needs through the revenues that these companies are bringing in. And so, we're not negative on high yield, though in our portfolios today, tactically, we just like equities more, because everything that could benefit high yield will benefit equities just as much, if not more than the high yield market.
And so, that's where we sit on high yield. Not a bad risk to take. Equities, seemingly a better risk to take. On the bank loan side, we're a little more negative on bank loans currently. Bank loans, which are effectively packaged up bank loans, for the name, that are sold to the markets in a securitized fashion, and they're generally floating rate, which means that they'll move with interest rates, the payment required of those companies. When rates move higher, it adds credit risk. And right now the credit risk of the bank loan market is a bit higher than the credit risk you're saying in high yield. So it's a little bit more of a risk/return benefit there. More return potentially, but also a little bit more risk.
Right now we're a little bit more negative on the space, and most recently with the Fed comments, Powell's comments around perhaps not cutting in December in the way in which the odds of a rate cut for December have come down, and the trajectory of going into 2026 is also a little bit higher according to the markets as well. That's put a little pressure there.
Now, going forward, if we're right that they start to cut rates more than what the markets are pricing in, bank loans may become more attractive as potentially rates come down, and that helps the ability for them to pay, and as long as the economy is continuing to do well, that higher risk, higher reward could become more attractive. But for now, we're a little bit more cautious on that space.
Overall, and the last thing I'll mention here, is that from a fulfillment perspective, active management tends to have a little bit better ability to provide outperformance, and provide that outperformance through security selection, because there's more dispersion in that market, there's more opportunities to seek out. So from that perspective, bank loans are certainly an interesting asset class.
Michael Miranda:
All right, Richard, back to you really quickly. On the credit space, are there any sectors or areas of the market we are especially favorable on, or seeking to avoid?
Richard Belley:
That's an interesting question. It's like, listening to Dan, it's really difficult to make it a bear case for credits currently. The market has been well-supported from a forecast perspective. The economy is chugging along. We're basically in an environment of relatively healthy balance sheet. So we remain constructive in general on the credit markets.
But at the same time, we need to be cognizant of the fact that spreads are currently at the tightest levels that they've been in the cycle. And in fact, when you're looking across the last couple of cycles, they're relatively tight, compared to historical perspective. So there's not a lot more value from a spread perspective that you can squeeze out. But from Dan's perspective, still from an all-in yield perspective, you're still getting paid.
Before looking at the individual sectors, we need to look at the overall environment in which we are, and then cover the high-yield space, senior loans. If I'm looking specifically from an investment grade perspective, like the triple Bs and higher, that space, there's a couple of things that we would be aware and that we need to monitor.
There's been, the spread's higher. The second thing, there's been a couple of unexpected surprises in the US, where companies have gone bankrupt. Even though for us it's not necessarily a red flag, because it's more isolated and due to fraud, but definitely a reminder that we cannot be complacent in this market, and a warning sign for investors, underwriters to be a bit more diligent with their analysis. So things are not necessarily all good everywhere. And to Dan's comment, active manager usually will find ways, add values, to be more selective going forward in these types of environment.
One more thing that we need to remember is that what we've seen in context of very tight spreads, we also see sometimes tighter spreads to move higher on the risk curve. So as an example, moving from a single A-rated corporate bond to a triple B-rated bond, at this point, the compensation you're receiving is not necessarily as attractive as it has been in the past. So in this environment, we would tend to have a better quality, lower data strategy. And to Dan's point, at this point, I think equity offers a better opportunity than the credit markets would offer.
Now, if we're looking at the individual sectors, one thing that we need to remember is supply overall. October was the largest in over a decade in the US, in terms of corporate bond issuances. If you're looking at all sectors, we're expecting increases between five and 20% in 2026. So we could see a bit of spread pressure, but yields and current level of spread should provide kind of a buffer against kind of volatility.
And if we consider it that what we've seen in recent weeks, an increased number of issuances coming out, capital expenses are increasing, increasing funding for AI and data centers. We saw deals in recent weeks related to M&A activities and reshoring manufacturing activities. So that is likely going to lead to a bit of spread pressure in some sectors. And for that reason, if I was to identify some of the sectors we want to be a bit more careful, I would note the technology, communication, and maybe to a lesser extent, the industrial sector.
But in terms of a sector that we continue to like, continue to recommend, continue to see good value, would be financials, the banks. We're seeing currently steady issuances for 2026, not major changes, and the earning outlooks remains relatively positive from our point of view.
Michael Miranda:
All right, thanks Richard. So, let's conclude, then, with each of you, just a quick perspective on what the biggest risks you see going into 2026. We'll start with Dan, and we'll give Richard the last word.
Dan Phillips:
Yeah, so from my end, I think that one of the big risks that has been in the markets recently is the concern around the politicization of the Fed, and the upcoming Fed chair announcement will be a really important barometer or marker for this. If the administration decides to go with someone too dovish, we could see a little bit of a market revolt, if you will, in the sense of the market saying, we gave you the benefit of the doubt with inflation a little bit high, but the labor market being a little weak, and therefore we haven't pushed back end rates higher out of fears of higher inflation or too much loss of Fed independence. But if you go too dovish, you're going to test our patience on that. So I think for the administration, picking someone who's dovish, but perhaps more centrally grounded, would be the wise choice. And if they go too dovish, that represents a risk.
Richard Belley:
Mike, from my point of view, I would say I am concerned with what Dan was mentioning, the independence of the Fed. I'm concerned about supply. But my number one concern currently is inflation. Even though we're way off peaks, I still think inflation is one major risk for the next six to 12 months. So far, core measures in the US and Canada remains like 3% to 2.5% percent respectively. Like Dan said, we are seeing some stability around 3% currently in the US, but it has been slower than anticipated to come back to the target.
And recently, we've seen a bit of an uptick in the numbers. We're not sure if that's going to be sustained. Could be temporary. Tariffs could be playing a role. But for me, there's always a risk that something is brewing under the hood. Something that is worth monitoring. Not that I think we're going to see huge rebounds like we've seen in 1940s and 1970s. Don't want to be a doomsayer here. But I think it's a risk, and as a fixed income investors, I'm always concerned about the future value of our cash flows. So something we're going to be looking at more closely.
And to be honest, and I'll finish on that, we may think that AI will prove, like any other technology in the past, to be deflationary. This may not come quick enough. In the short term, we still have to deal. Like Dan said, there is a risk for the Fed to become more dovish, but there's also pro-growth fiscal policies, trade policies, large budget deficit, ultimately that could lead inflation to be higher for longer. So, something worth monitoring.
Michael Miranda:
All right, well, that was a fantastic conversation. Thank you, Dan and Richard, for the thoughtful insights on what's shaping the fixed income markets, credit markets, and certainly a very detailed outlook as we move towards 2026. We impact a lot there, certainly on the Central Bank policies and inflation and growth. Our views on where we thought interest rates across the curve would be, both in US and Canada throughout 2026, and then some thoughts on spread sectors and credit markets.
This is just the start of our Beyond the Portfolio 2026 outlook series. Up next, as I mentioned, we'll turn to equities, followed by private markets and alternatives, and finally, our capital market assumptions and themes for 2026. So stay tuned for those conversations over the coming episodes.
I'm Mike Miranda. Thanks for listening, and we'll see you next time as we continue exploring the insights that shape portfolios, markets, and the world beyond the portfolio.
Thank you for listening to Beyond the Portfolio. You could follow us on Apple Podcasts, Spotify, or your favorite podcast app. Until next time, I'm Mike Miranda.
Richard Belley:
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