Fixed income

Canadian bonds generally declined in Q2 as government bond yields rose. The primary factor driving Canadian bond yields up was the uncertainty surrounding U.S. tariff policy and the potential escalation of tariffs on Canadian goods and services. On the positive side, the year-over-year Canadian inflation rate fell to an eight-month low during the quarter. Nonetheless, the Bank of Canada (BoC) left short-term interest rates unchanged at its policy meetings in April and June after seven consecutive rate cuts. The Canadian central bank cited the unpredictability and magnitude of U.S. tariffs, which could lead to both weaker Canadian economic growth and rising inflation, as the reason for its pause.

Canadian government bond yields moved higher across the board during Q2, with long-term bond yields rising the most amid the tariff-related inflationary risks. From a sector perspective, government bonds declined during the quarter, while investment-grade corporate bonds posted modestly positive returns.

Equities

After a poor start, Canada’s stock market recovered to deliver a solid return in Q2. Equities plunged in the first week of April following U.S. President Donald Trump’s announcement of tariffs that were far higher than investors had been expecting. The downturn proved short-lived, however, as President Trump enacted a 90-day pause on the initial tariffs within a week. Stocks surged in response, as investors concluded the earlier announcement was largely a negotiating tactic. Continued interest rate cuts by the BoC provided further support for equities as the quarter progressed. The rally persisted through the end of June, leading to a series of all-time highs for the S&P/TSX Index. Gold miners and financial stocks each performed well, offsetting a weaker showing for energy.

World equity markets surged in Q2, propelling most broad-based global indexes to all-time highs by the end of June. The quarter opened with a pronounced sell-off in response to President Trump’s Liberation Day announcement that imposed much higher tariffs than investors had been expecting. As market turmoil mounted, President Trump pivoted by placing a 90-day pause on his initial plan. The move raised hopes that trade policy would ultimately be less restrictive than first thought, quickly restoring confidence. Stocks soon recovered all of their earlier losses as data related to global growth, inflation, and corporate earnings exhibited stability despite the shifting policy backdrop. European stocks and emerging markets led the way in the rally, while the United States lagged.

Canada yield curve (%)

Source: Bank of Canada, Manulife Investment Management, as of June 30, 2025. 

In Q2 2025, the average funded status improved significantly, increasing from 138.0% to 143.9%, the highest level since December 2020. This improvement was driven by rising yields, which reduced liabilities, and asset growth from positive returns in global equities, Canadian equities, infrastructure, and real estate. Consequently, the funded status improved due to both the increase in assets and a reduction in liabilities.

Funded status (%) of average DB pension plan in Canada

Source: Pfaroe Moody’s Analytics 2025, as of June 30, 2025. 

The average asset mix represents a combination of growth, hedging, and diversifying assets—each playing a unique role in the functioning of the pension portfolio. The average asset mix implies an interest rate hedge ratio of 55.8%, relative to the interest rate exposure of the average liabilities.¹

Based on Manulife’s capital markets assumptions, the average asset mix implies an expected return of 6.43%. Based on Manulife’s modeling and stress testing, there’s a 95.00% probability that losses relative to liabilities will be less than 12.67%.

Source: Pfaroe Moody’s Analytics 2024 as of June 30, 2025. VaR refers to value at risk. 

Equity risk represents a large component of risk exposure for defined benefit pension plans, and a drastic downward move in equity prices has the potential to reduce a big portion of the surplus of the average plan. A decrease in interest rates also has the potential to negatively affect the surplus of the average DB pension plan, as it would lead to an increase in the present value of liabilities.

Risk analysis of the average Canadian DB pension plan

In our model, a fair amount of risk is diversified away, and along with significant equity risk, the average pension plan also has exposure to interest rate, credit, and property risk.

Value at risk

Source: Pfaroe Moody’s Analytics 2025, as of June 30, 2025.

Solvency funded ratio of the average Canadian DB pension plan across various scenarios

Based on our scenario analysis, the median forecasted solvency funded ratio for the average Canadian DB plan is 148.0% in June 2026 and 155.6% in June 2035.

Source: Manulife Investment Management, as of June 30, 2025. Scenarios are projected from best to worst case. 

Canada’s economy ended 2024 on a relatively strong footing, supported by an improved global trade picture and a positive shift in domestic conditions. By mid-2025, however, U.S. tariffs imposed on key Canadian exports (including steel, aluminum, and autos) had disrupted the nation’s trade activity and weighed heavily on business sentiment. As the effects of the tariffs filter through the Canadian economy, we expect a protracted slowdown in the second half of 2025, followed by a gradual rebound in 2026 and 2027. This forecast notably hinges on the BoC providing some additional monetary easing in the next 12 months, which is currently in question due to rising inflation. We believe that given volatile government policies, U.S. economic growth will probably slow during the second half of 2025. In fact, heightened uncertainty around trade policy has already had noticeable effects on the economy this year, including massive swings in net trade and inventory building, along with a now-unwinding pull-forward in business activity. At this stage, we see signs of a moderating labor market, weakening industrial production, and flagging household consumption. Upward inflationary pressures due to reciprocal tariffs haven’t yet hit the U.S. economy, but it may only be a matter of time before they do. However, from the U.S. Federal Reserve's (Fed’s) perspective, we believe a focus on softening growth and job market dynamics will ultimately win out over inflationary concerns, leading to further interest rate cuts in the coming months that bring the Fed funds rate to 3.5% by mid-2026. Across global markets, the question of whether American exceptionalism is at an end is being asked more frequently amid mounting worries about U.S. fiscal policy and the country’s relationships with key allies.

Maintaining a diversified and disciplined approach helps manage risk, while focusing on long-term goals, during uncertainty. Geographic diversification beyond the United States is increasingly important as economic and geopolitical landscapes evolve.

1 Liability assumptions. 2 Asset mix assumptions. 

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