report<\/a> maintaining a stable AAA rating for the country. \u201cWe have a high degree of comfort in that credit rating, thanks to the country\u2019s large and diversified economy, strong governing institutions, and sound macroeconomic policymaking,\u201d writes DBRS senior vice president and sector lead of global sovereign ratings Travis Shaw.<\/p>\nSam Acton, portfolio manager, co-head fixed income at Picton Investments, says the deficit and bond issuance figures \u201ccame out toward the low end of expectations, providing a slight initial relief to the bond market, with government yields dropping 3-4 basis points across the curve.\u201d<\/p>\n
Dustin Reid, chief strategist, fixed income at Mackenzie Investments, observes that issuance plans were little changed, and there was no uptick in the 10- and 30-year ends of the curve, as some had feared. \u201cAs a result, there should be no major impact on the Canadian sovereign curve in the short-term,\u201d he says. This would drive up yields to compensate for added risk. Since government bonds are the benchmark for other borrowing rates, rising yields push up the cost of borrowing for homeowners and businesses.<\/p>\n
All things considered, Ashish Dewan, senior investment strategist at Vanguard Canada, expects Canadian bonds to deliver annualized returns in the range of 3.2%-4.2% over the next ten years.<\/p>\n
A Supportive Budget Gives the Bank of Canada a Chance to Pause Cuts<\/p>\n
The budget comes at a challenging time for the domestic economy, which needs support against headwinds from trade tension, weaker growth, a cooling market, and sluggish business and consumer spending.<\/p>\n
Dewan doesn\u2019t anticipate further interest rate cuts from the Bank of Canada this year, but he expects \u201ceconomic support to be a priority over inflation containment, as GDP growth is below trend and labor market conditions are softening.\u201d<\/p>\n
A similar forecast puts RSM\u2019s Brusuelas in the same camp: \u201cMonetary policy can only do so much under current\u202fconditions,\u202fand Carney is uniquely suited to\u202funderstanding\u202fthat.\u201d The central bank has cut rates four times this year, including back-to-back cuts at its last two meetings, bringing its policy rate down to 2.25%\u2014the lowest end of its neutral range.<\/p>\n
Picton\u2019s Acton strikes a contrasting note, expecting the Bank to continue to lower rates. \u201cWith the backdrop of stagnant growth and lingering economic uncertainty, the Bank may still need to react with a further reduction in interest rates over the next year,\u201d he says.<\/p>\n
Mackenzie\u2019s Reid says the additional fiscal stimulus might keep the Bank on the sidelines for a bit longer, but policymakers were already aware of much of the announced spending. \u201cAs a result, further deterioration in Canada\u2019s short-term economic outlook will keep the Bank of Canada ready to cut rates again,\u201d he says.<\/p>\n
Brusuelas says the Bank\u202fof\u202fCanada is well-positioned to cut further to\u202fcomplement\u202ffiscal policy, should the domestic economy remain sluggish.<\/p>\n
Stock Investors Should Sit Tight<\/p>\n
The proposed C$280 billion in investments are spread across C$115 billion for infrastructure, C$110 billion for productivity and competitiveness, C$30 billion for defense, and C$25 billion for housing.<\/p>\n
Vanguard\u2019s Dewan says investors looking for opportunities in these allocations will need to dig deeper. Asset class returns are influenced by a wide range of variables, not just government spending. \u201cFactors such as trade policy, the rise of artificial intelligence, structural deficits in the United States, deglobalization, and demographic shifts will play a significant role in shaping future investment opportunities both in Canada and globally,\u201d he explains. It\u2019s also important to recognize that promises in the budget may look different when implemented.<\/p>\n
A Modest Rebound in the Canadian Dollar Looks Likely<\/p>\n
The key consideration for the currency market is whether the budget provides enough growth-boosting investment without triggering fiscal instability, according to Tom Nakamura, currency strategist and co-head of fixed income at AGF Investments. \u201cCurrency investors want to see a credible path forward for the Canadian economy to adjust to shifting international trade relations,\u201d he explains.<\/p>\n
Canadian investors are focused on whether the budget will provide enough stimulus to keep further interest rate cuts off the table. Overall, Nakamura isn\u2019t \u201cexpecting a large direct reaction to this [budget] from the Canadian dollar in the near term.\u201d He thinks the execution of the plan will determine the direction of the Canadian dollar over time.<\/p>\n
For now, the currency market appears to be driven by the global investing pivot to risk-off sentiment. Sarah Ying, head of FX strategy at CIBC, says, \u201cThe risk-off tone is hitting high-beta pairs, [as the] US\/CAD already has exceeded highs of C$1.41.\u201d High-beta pairs are currencies that tend to fall more sharpy against the US dollar. During times of uncertainty, investors move money away from riskier currencies, seeking refuge in safer ones such as the US dollar. Ying calls the 2025 federal budget \u201cvery benign, happy,\u201d as the lower-than-expected deficit helped alleviate the budget-driven market anxiety.<\/p>\n
Still, other risks abound. Nakamura sees many headwinds before year-end, including the formal approval of the budget and a US Supreme Court ruling on tariffs. There\u2019s also the matter of Lisa Cook, a US Federal Reserve governor whom President Donald Trump has attempted to fire. The move threatens the independence of the US central bank, weakening the US dollar, which in turn lifts the loonie. \u201cThese will undoubtedly shape market reactions over the next few months, but my base case is for a modest rebound in the Canadian dollar, from C$1.41 toward C$1.39,\u201d Nakamura says. He adds that this strength is likely to be driven further by the softening of the US dollar.<\/p>\n
The author or authors do not own shares in any securities mentioned in this article. Find out about
\n\t\t\t\t\t\t\t\t\tMorningstar’s editorial policies.
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