Caution, credit, and Canada’s recession risk

IN Partnership with

Canadian investors confront weak growth, consumer strain, and US-driven yield shifts; Franklin Templeton’s Adrienne Young outlines a disciplined approach to fixed income

AS OF mid-2025, the case for bonds has rarely been clearer on paper. All major fixed income sectors were yielding above their five-year averages as of June 30, enhancing the appeal of bonds for income-focused investors. Historically, this is when flows tilt back toward fixed income. Yet elevated short-term rates have drawn significant assets into money market funds and other low-risk vehicles instead. Corporate credit spreads remained unusually tight through the first half of the year, even after April’s tariff shock briefly pushed them wider. Markets stabilized once tensions eased, but valuations stayed expensive. The baseline outlook now assumes that sustained tariffs will slow real GDP growth and add to inflationary pressure. Adrienne Young, senior vice president and director of Canadian corporate credit research at Franklin Templeton, has built her fixed income career on a clear mandate: clients should be able to sleep at night. That principle explains why she is cautious on duration, selective on credit, and patient in waiting for better entry points. It also resonates with Young’s colleague Darcy Briggs’ reminder that visibility itself is often the scarcest commodity. “If you have a high degree of uncertainty and very little visibility going forward, that’s just naturally going to slow activity,” he notes.

Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 150 countries. In Canada, the company’s subsidiary is Franklin Templeton Investments Corp., which operates as Franklin Templeton Canada. Franklin Templeton’s mission is to help clients achieve better outcomes through investment management expertise, wealth management, and technology solutions. Through its specialist investment managers, the company offers specialization on a global scale, bringing extensive capabilities in fixed income, equity, alternatives, and multi-asset solutions. With more than 1,300 investment professionals and offices in major financial markets around the world, the California-based company has over 75 years of investment experience.

Find out more

CANADA CPI (YOY % CHANGE)

Sep-23

“Canada’s long-term inflation outlook may not look that horrible, but we are being dragged higher by the US curve and, to an extent, the European curves. That means being super careful about where you position”

Adrienne Young, Franklin Templeton

Young begins with the numbers. In August, Canadian CPI came in at 1.8 percent, just shy of the Bank of Canada’s 2 percent target. GDP contracted by 1.6 percent annualized in the second quarter, weaker than consensus expectations.

The Bank of Canada itself acknowledged in its September 17 news conference that the labour market is clearly weakening, particularly in trade-sensitive industries. Canada lost 41,000 jobs in July and a further 66,000 in August, effectively erasing most of June’s gains. The unemployment rate has climbed to 7.1 percent, a new cycle high, and is expected to rise further in the months ahead. That backdrop − slowing job creation, the peak of mortgage renewals, and softer household spending − was central to the Bank’s decision to cut its policy rate by 25 basis points to 2.50 percent. With inflation now at 1.9 percent, real rates remain positive and therefore restrictive. For an economy carrying high levels of both public and household debt, that stance is still too tight, according to Young and her team. Young sees room for at least two or three additional cuts to bring the overnight rate closer to 2 percent, a level more consistent with stabilizing consumption and credit conditions. That mix, together with these data, is what the Bank considered in its September 17 decision − which Young predicted − to reduce its overnight policy rate from 2.75 to 2.50 percent. The central bank cited a weakening job market, slowing GDP, and reduced upside risk to inflation. The curve complicates the narrative. The front end is driven by central bank decisions, while the long end is governed by inflation expectations and fiscal credibility. Canadian 30-year yields have climbed alongside those in the United States and Europe, pulled higher by deficit and debt concerns abroad. “Canada’s long-term inflation outlook may not look that horrible, but we are being dragged higher by the US curve and, to a certain extent, the European curves,” Young says. “That means you have to be super careful about where you position.”

Rate cuts may help, but their effects are uneven. Steepening at the front end of the curve should eventually pull mid-term yields lower, offering some relief to borrowers and supporting business investment. Yet longer-dated yields are likely to stay anchored higher due to global deficit concerns, limiting how far the whole curve can shift. There are also side effects: lower rates could reignite housing demand, doing little to address affordability, and they will not resolve Canada’s longer-term structural issues such as weak productivity growth and lack of foreign direct investment. Until that picture stabilizes, Young is running close to neutral duration. “We do not want to risk giving our investors more pain at the long end until we have more conviction,” she explains.

Young’s strategies are built for Canadian investors, so domestic bonds remain the core. But Canada’s market is smaller, less diversified, and less liquid than the United States’. That structural difference makes Canada more sensitive to shocks. “Canada is going to feel a recession more intensely than the US,” she says. “It really is the mouse sleeping with the elephant. When the US moves, Canada is affected.” When the US shifts, Canada shifts with it. That is why she uses US exposure as a tool. The US market opens access to sectors that are difficult to own in size in Canada, such as aerospace and defence, healthcare, and broader industrials. It also allows her to buy very high-quality names in markets with deep liquidity. The Canadian consumer remains her biggest worry. “Spreads right now are extraordinarily tight, especially when you factor in the fact that we are likely looking at a weaker economy going forward,” she explains. “We are not being appropriately paid for consumer-related risk because the Canadian consumer is probably going to be the roughest part of the economy.” That informs her cautious stance on credit unions and issuers especially exposed to housing cycles. Still, she sees opportunity in volatility. When spreads eventually widen, she will look for attractive entry points. “When that volatility happens, I will look at them and say, that is juicy and perhaps I will buy. But right now, I would rather not own them.” Liquidity is the lever. “Canada is not an especially liquid market,” she says. “If you are the one who has the cash to buy when everybody else is selling, you have a huge advantage.” That principle drives her preference for government bonds, the best-quality banks, and US high yield, which can be sold easily if conditions change. “When we get those kinds of backups, that is when we can make our real money.” Briggs captures the cycle: sectoral tariffs create weakness, which then slows activity and raises unemployment, pulling in sectors that were never targeted. “It becomes a loop,” he says, “and spreads eventually widen as financial stress builds.”

Young manages Canadian strategies, but she makes full use of Franklin Templeton’s global platform. She remains overweight on corporate bonds relative to the Canadian benchmark, but less so than usual. Shorter-dated, higher-quality names are preferred, as they provide yield without unnecessary volatility. A single-A bond yielding 3.5 percent or more, she argues, is compelling in the current environment. Within financials, she often favours US money-centre banks over Canadian peers when spreads provide even modest extra compensation. US banks have limited exposure to Canadian household credit and offer more liquidity. Canadian banks and

Concept of corporate business economy and financial growth by investment

Why cuts are back on the table

The elephant and the mouse: credit stress at home

Published October 07, 2025

“Canada is going to feel a recession more intensely than the US. It really is the mouse sleeping with the elephant. When the US moves, Canada is affected”

Adrienne Young, Franklin Templeton

Oct-23

Nov-23

Dec-23

Jan-24

Feb-24

Mar-24

Apr-24

May-24

Jun-24

Jul-24

Aug-24

Sep-24

Oct-24

Nov-24

Dec-24

Jan-25

Feb-25

Mar-25

Apr-25

May-25

Jun-25

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

Source: Macrobond, as of September 30, 2025

Source: Bloomberg

Canadian yield curve as of October 1, 2025

October 1st, 2023

Briggs, senior vice president and portfolio manager for Franklin Templeton, adds that volatility around policy itself can have lasting effects. “Uncertainty itself leaves scars,” he says. “Even if tariffs were rolled back tomorrow, I do not think we would go back to the way things were. There is always that doubt that they could return the next day.”

Global depth and process discipline

credit unions, by contrast, look vulnerable to refinancing pressures and consumer strain. Her team is selective. In US high yield, valuations are tight, so they favour “rising star” issuers with credible paths back to investment grade. Currency is managed carefully. The portfolio may hold roughly a quarter of its assets in US dollars, but hedges usually reduce unhedged exposure to single digits. Weekly reviews of fundamentals, technicals, and valuation anchor every decision. The aim is not to produce outsized gains in a single period but to build returns steadily while avoiding losses that erode confidence. Briggs underlines the point. “This is when active management shines,” he says. “You have to be nimble, capitalize on opportunities, and always be ready to shift when the facts change.”

For advisors, Young’s message is straightforward. Fixed income is not designed to deliver equity-like growth. It is the stabilizer in portfolios, the asset class that allows clients to hold risk elsewhere with greater confidence. Today, that role is best served by quality credit, ample liquidity, and global diversification applied selectively. Her emphasis is on aligning expectations. “We aim for lots of small wins in order not to have any big losses,” she says. Briggs brings the conclusion into sharper relief. Tariffs, tight spreads, and slowing growth have created a market that threatens to punish complacency. “Even if you got a relief rally, you would not go back to the way things were,” he says. Young sees that reality as the essence of active management. With yields reset, spreads tight, and risks unevenly distributed, fixed income outcomes will depend less on heroic calls than on steady execution. “We finally have a positively sloping yield curve again in both the US and Canada,” she says. “That means when the time is right, we will be able to move farther out with confidence. But until then, we are being cautious.”

The advisor lens

Important legal information This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell, or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. The views expressed are those of the investment manager, and the comments, opinions, and analyses are rendered as at publication date and may change without notice. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region, or market. Commissions, trailing commissions, management fees, brokerage fees, and expenses may be associated with investments in mutual funds and ETFs. Please read the prospectus and fund fact/ETF facts document before investing. Mutual funds and ETFs are not guaranteed. Their values change frequently. Past performance may not be repeated. Franklin Templeton Canada is a business name used by Franklin Templeton Investments Corp.

Companies

About us

Privacy

RSS

People

Newsletter

Authors

External contributors

News

Your Practice

iNVESTMENTS

bEST IN WEALTH

Resources

Jul-25

Aug-25

October 1st, 2024

October 1st, 2025

Companies

About us

RSS

People

Newsletter

Authors

External contributors

News

Your Practice

Investments

Resources

Best in Wealth

News

Your Practice

Investments

Resources

Best in Wealth

Companies

About us

Privacy

RSS

People

Newsletter

Authors

External contributors