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Look beyond Canada for bond diversification and yield
Naoum Tabet
March 13, 2026
In today’s complicated fixed income landscape, Canadian investors are increasingly seeking ways to enhance portfolio resilience, income generation and diversification.
“One potential solution may lie outside Canada,” says fixed income investment director Naoum Tabet. According to Tabet, the limitations of the Canadian bond market are becoming more apparent, especially when compared to the breadth and depth of U.S. bond markets.
“The Canadian investment-grade (IG) bond market is a useful example,” says Tabet.
He describes the market as being relatively small and highly concentrated in three sectors: banking, utilities and energy. Further, these sectors in Canada are interlinked, which potentially exposes investors to commodity cycles. This structural concentration can limit diversification and increase vulnerability to economic shocks that may affect these industries.
Moreover, liquidity in the Canadian IG bond market is limited. With fewer issuers and less trading volume, investors may face challenges in executing trades efficiently or finding attractive entry points. Limited liquidity can also lead to pricing inefficiencies and reduced flexibility in portfolio management. Unlike the U.S. market, which is guided by the mandatory reporting system of over-the-counter transactions, Canada lacks a strong centralized reporting system, making Canadian corporate bond pricing semi-opaque, dealer driven and concentrated in institutional, with less transparency than the U.S. market.
The U.S. advantage: Scale, sector breadth and yield
In contrast, the U.S. IG bond market is the largest and most diverse in the world. It spans hundreds of issuers across a dozen-plus number of sectors, including consumer non-cyclicals, technology, and capital goods — areas largely absent from the Canadian landscape.
“This breadth provides Canadian investors with exposure to a wider array of economic drivers and reduces reliance on any single sector,” says Tabet.
From a yield perspective, as of February 28, 2026, U.S. IG bonds yielded 4.8% in comparison to their Canadian IG counterparts at 3.6%. This equates to a yield differential of 1.2%.
“The yield differential is particularly attractive given the similar credit quality and risk profiles of investment-grade bonds in both markets,” adds Tabet.
When it comes to aggregate yields, which encompass most bond segments in each country, the difference is 3.3% in Canada compared to 4.2% in the U.S.
Higher yields outside Canada
Aggregate and select Canadian vs. U.S. bond yields (average yield-to-maturity)
As of February 28, 2026
Sources: Capital Group, Bloomberg, S&P.
*Canada aggregate represented by FTSE Canada Universe; U.S. aggregate represented by Bloomberg U.S. Aggregate Bond Index; Canada investment grade represented by S&P Canada Investment Grade Corporate Bond Index; U.S. investment grade represented by Bloomberg U.S. Corporate Investment Grade Bond Index.
Currency hedging: Cost today, opportunity tomorrow
One of the primary concerns for Canadian investors considering U.S. bonds is currency risk. Hedging U.S. dollar exposure can reduce volatility but comes at a cost, which is currently significant.
This cost initially offsets the yield advantage of U.S. bonds, but it’s worth noting that these costs are not static. They are driven by the interest rate differential between Canada and the U.S., and are reset whenever the currency-hedging derivative instruments are rolled forward (typically monthly), as depicted in the chart. It illustrates the historical and projected relationship between U.S. and Canadian interest rates and the corresponding cost of hedging U.S. dollar exposure back to Canadian dollars.
Through the course of this year (2026), the interest rate differential between the U.S. (blue line) and Canada (black line) is anticipated to narrow, as shown by the dotted forecast segment. The forecast rates are those implied by derivatives markets. This convergence suggests a decline in the estimated hedging carry cost (green bars), reducing the expense of currency-hedging U.S. bond investments for Canadian investors.
Locking in higher U.S. yields today may be rewarding tomorrow
Historical and forecasted U.S./Canada rate differential and hedging carry costs
Source: Capital Group, Bloomberg. Forecasted rates are based on derivatives markets implied policy rates observed on March 5, 2026.
According to Tabet, this dynamic creates a window of opportunity: investors can lock in higher U.S. IG yields today while anticipating lower hedging costs in the future.
“Over time, this could result in a cumulative yield advantage of over 100 basis points compared to staying in Canadian IG bonds,” he says.
The following illustration is designed to help demonstrate the anticipated, potential yield advantage. The chart compares two hypothetical corporate bonds with the same 5-year maturity. One is a U.S. bond with a 6% annual coupon rate, the other a Canadian bond with 4% annual coupon rate. Importantly, the coupon rates are fixed until maturity, but the cost to hedge currency risk on the U.S. bond is not, as most institutional hedging programs use one-month rolling currency forward contracts.
This means the carry cost of hedging — driven by the aforementioned U.S.-Canada interest rates differential, can change every month. The U.S. bond becomes more attractive relative to the Canadian bond when the carry cost of hedging decreases.
Timing matters
According to Tabet, now may be the best time to act.
“Investors have an opportunity to lock in higher U.S. IG yields today and potentially benefit from favourable rate conditions tomorrow enhancing long-term income and strengthening portfolio resilience.”
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