Where bonds can still reward you for taking the right chances
IN Partnership with
Franklin Templeton Canada’s Adrienne Young on where advisors can still find value when most of the yield is coming from rates
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Investment grade bond yields in Canada and the US are sitting well above their post-financial-crisis averages. Credit spreads − the extra compensation investors get for taking on corporate risk instead of buying government bonds − are sitting near multi-year lows. Both things are true at the same time, and that gap is the central problem facing Canadian fixed income investors right now.
Adrienne Young, senior vice president and director of credit research for Franklin Templeton Fixed Income in Canada, has spent over 27 years in the industry, including prior roles at DBRS, RBC Capital Markets, and Credit Suisse in Toronto and New York. She co-leads management of the Franklin Canadian Core Plus Bond, Franklin Canadian Corporate Bond, and Franklin Canadian Short Term Bond strategies.
Her read on the current market is that bonds are paying investors well through yield but not paying them nearly enough for the credit risk sitting alongside that yield. That changes how she thinks portfolios should be built from here.
“We’re finally getting paid for taking risk out the curve,” she says. “What we are not getting paid especially well for is taking credit risk.” The imbalance leaves little room for error in credit selection.
Franklin Resources, Inc. [NYSE:BEN] is a global investment management organization with subsidiaries operating as Franklin Templeton and serving clients in over 155 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 boutique specialization on a global scale, bringing extensive capabilities in equity, fixed income, multi-asset solutions, and alternatives.
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“Energy feeds into every industry that we have, that anybody has. I think we’re going to see that continue to feed into food prices for a while, into the cost of transportation, into the cost of building anything”
Adrienne Young,
Franklin Templeton
Published Oct 23, 2026
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“We’re finally getting paid for taking risk out the curve. What we are not getting paid especially well for is taking credit risk. The imbalance leaves little room for error in credit selection”
Adrienne Young,
Franklin Templeton
were invested in passive funds couldn’t avoid it. Those of us who are managing active funds can help our investors avoid that.”
The same discipline applies today. With much of the yield in fixed income coming from government rates rather than credit spread, Young prefers not to take risk indiscriminately just to capture yield. “Short duration provides flexibility; our Canadian Core Plus Bond fund offers a broader toolkit to take advantage of opportunities as they emerge. The opportunity, in other words, is not about taking more risk. It is about taking the right kind of risk and avoiding the kind that offers little reward,” Young says.
“In a market that has this much potential for volatility, you’re not really paid to take that risk,” Young says. “What you want is a fund where people are picking and choosing carefully for liquidity, for credit quality, for true diversification.”
Part of what’s keeping that risk unsettled is that the rate cycle itself hasn’t settled.
Canada has its own rate story, but not entirely Canada and the US are no longer moving in lockstep, even though their bond markets still trade as if they are. Young describes Canada as softer than the US, even after both economies held up better than many forecasts suggested. Canada has made it through much of the mortgage reset cycle without the degree of damage some had anticipated, while growth remains positive but subdued.
The Canadian economy gives the Bank of Canada relatively little reason to be aggressive. On domestic conditions alone, Young would not expect the Bank of Canada to be looking seriously at higher rates.
The complication is that the rate outlook is being shaped by forces that sit well outside Canada. Young points to energy prices, tariffs, and the scale of capital spending tied to AI infrastructure as sources of inflation pressure. AI-related infrastructure spending alone is adding to demand for electricity and construction labour, on top of the direct energy costs tied to the war.
“Energy feeds into every industry that we have, that anybody has,” she says. “I think we’re going to see that continue to feed into food prices for a while, into the cost of transportation, into the cost of building anything.”
US monetary policy is another constraint. If American rates move higher, a wider rate differential has implications for the Canadian dollar.
“Will the Bank of Canada hike because our markets are dragged along by theirs to some extent? They may,” Young says. Her base case is that Canada could see one or two rate increases in 2027.
That has kept duration decisions fluid. Portfolios can remain invested without committing heavily to the long end, which is where Young thinks the Franklin Canadian Short Term Bond strategy may be helpful for some investor portfolios.
Short duration without sitting in cash Young describes the Franklin Canadian Short Term Bond strategy as a “strategic tool” for wealth managers making active allocation decisions on behalf of clients.
It is designed to remain relatively short duration, limiting some of the sensitivity to large rate moves, but it is not confined to the narrow opportunity set of a conventional short-term portfolio.
The strategy can invest outside Canada and uses derivatives to substantially reduce the resulting currency exposure, while retaining some US dollar exposure as a hedge. It also tends to carry an overweight to credit, giving the portfolio access to corporate spread while keeping its rate exposure relatively short. The same active mandate lets the team lean away from sectors with elevated tariff risk, autos among them, when the pricing no longer compensates for it.
“You can be in a short-duration fund or even an ultra-short-duration fund and have the liquidity that allows you to, next Wednesday, say, ‘I’ve changed my mind, we’re all in,’” Young says.
That flexibility is exactly what some advisors have started building into a broader allocation approach.
A barbell for clients who aren’t ready to commit Some of Franklin Templeton’s advisor clients have landed on a barbell approach, Young says, one that lets them stay invested without betting the whole allocation on where rates go next.
The pattern she describes starts with GICs, shifts into ultra-short duration funds once reinvestment becomes difficult, and then moves gradually into short duration strategies as yields compress further at the front end. The short duration fund draws on some of the same tools used in the core plus strategy, including spread exposure and diversification, without taking on the full duration risk that comes with a core plus allocation. As conviction builds that the rate cycle has settled, the money tends to migrate into a longer duration core plus mandate. “They have then moved out of ultra short as yields have started to compress at the front end and into short duration,” she says. “And they get a better yield.”
The short-term strategy ends up doing two jobs in the current market: generating income without requiring a large duration commitment and preserving the ability to move once the rate outlook becomes clearer.
“Right now, I’d say a balanced place between the two is a lovely place to be,” Young says. “There is going to come a time when I’m going to start pounding the table on the issue of moving out the curve. But today is not that day.”
Waiting for the right moment to extend duration is one kind of judgement call. Further out the curve, Young’s team had already made a different one, betting on a supply shift before the market had fully priced it in.
Anticipating a supply wave before it arrived Young’s clearest recent example of active management adding value goes back roughly a year, to a moment when long-dated corporate paper was scarce and expensive.
“There was not very much 30-year corporate bond paper out there, and there were a lot of investors wanting it,” she says, “so you had a real supply−demand imbalance.”
This year that imbalance reversed. Amazon and Google both issued bonds maturing around 2056, joined by a wave of long-dated utility and industrial paper, and some of the earlier, more richly priced deals widened out as a result.
Passive funds tracking those indices had no way to avoid the repricing, since the bonds were index-eligible regardless of valuation. Young’s team minimized exposure during the supply wave and bought selectively elsewhere on the curve instead. “Everybody saw it coming,” she says, “but folks who
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90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Spreads as % of yields
Average
+SD1
Canada – option-adjusted credit spread as % of yields
(as of September 22,2026)
9/1/2006
9/1/2010
9/1/2010
9/1/2015
9/1/2020
9/1/2025
9/1/2026
+SD2
-SD1
-SD2
Source: Bloomberg
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
0%
-2.18%
0.30%
2.77%
1.18%
2.46%
3.74%
4.62%
4.67%
4.71%
8.16%
6.93%
5.69%
11.78%
9.23%
6.68%
Total return (%)
10-year and 3-year barbell
Total return (%) for different bond-yield scenarios
Yields rise (+100bps)
No change (0bps)
Yields fall (-100bps)
Yields rise (+50bps)
Yields fall (-50bps)
Source: Bloomberg. Data as of September 22, 2026
100% 10-year
50% 10-year / 50% 3-year
100% 3-year