Key Takeaways
- • Fixed income markets face macroeconomic headwinds entering 2026 despite a year of steady 2025 performance, driven by U.S. fiscal and regulatory changes implementation and evolving Federal Reserve policy stance, according to Steve Locke, CIO of fixed income at Mackenzie Investments.
- • The U.S. Federal Reserve is expected to maintain an easing bias but will not cut rates at every meeting in 2026; instead, it may move toward a neutral policy stance, which creates a "benign movement" environment for fixed income markets.
- • The Bank of Canada is projected to cut its policy rate significantly in 2026—potentially up to 325 basis points—as it contends with a slowing economy, limited productivity gains, and structural consumer headwinds, with cuts likely to exceed current market pricing.
- • Canadian fixed income markets face geopolitical volatility and trade policy uncertainty stemming from anticipated renegotiations of the United States-Mexico-Canada Agreement, though demand for debt capital issuance is expected in the second half of 2026.
Summary
Fixed income investors should prepare for an uncertain macroeconomic environment as 2026 begins, despite favorable conditions throughout 2025. Steve Locke, chief investment officer of fixed income and multi-asset strategies at Mackenzie Investments, highlighted that U.S. fiscal and regulatory changes announced in summer 2025—particularly components of a major legislative package—will be implemented in the new year, creating headwinds for fixed income markets.
The outlook for U.S. monetary policy remains a critical variable. While the Federal Reserve maintains an accommodative stance, Locke cautioned that rate cuts will not occur at every meeting, and the central bank may instead target a neutral policy position. This measured approach creates what Locke characterizes as a "benign movement" scenario for fixed income, reducing the volatility risk that would accompany either aggressive easing or tightening cycles.
Canada presents a notably different dynamic. The Bank of Canada is expected to implement substantial rate cuts throughout 2026 as it grapples with economic slowdown, constrained productivity gains, and structural pressures on consumer spending. Locke projects cuts potentially reaching 325 basis points over the next 12 months—a figure notably higher than current market expectations, suggesting significant repricing risk in Canadian fixed income markets. However, this dovish outlook is tempered by ongoing geopolitical concerns and uncertainty surrounding trade negotiations, particularly the renegotiation of the United States-Mexico-Canada Agreement.
For Canadian fixed income specifically, Locke noted that market conditions remain "fairly benign," with anticipated demand for debt capital issuance concentrated in the second half of 2026. This timing suggests investors should monitor economic data and central bank communications closely in early 2026, as diverging trajectories between U.S. and Canadian monetary policy create both opportunity and complexity for multi-jurisdictional fixed income portfolios.
The outlook for U.S. monetary policy remains a critical variable. While the Federal Reserve maintains an accommodative stance, Locke cautioned that rate cuts will not occur at every meeting, and the central bank may instead target a neutral policy position. This measured approach creates what Locke characterizes as a "benign movement" scenario for fixed income, reducing the volatility risk that would accompany either aggressive easing or tightening cycles.
Canada presents a notably different dynamic. The Bank of Canada is expected to implement substantial rate cuts throughout 2026 as it grapples with economic slowdown, constrained productivity gains, and structural pressures on consumer spending. Locke projects cuts potentially reaching 325 basis points over the next 12 months—a figure notably higher than current market expectations, suggesting significant repricing risk in Canadian fixed income markets. However, this dovish outlook is tempered by ongoing geopolitical concerns and uncertainty surrounding trade negotiations, particularly the renegotiation of the United States-Mexico-Canada Agreement.
For Canadian fixed income specifically, Locke noted that market conditions remain "fairly benign," with anticipated demand for debt capital issuance concentrated in the second half of 2026. This timing suggests investors should monitor economic data and central bank communications closely in early 2026, as diverging trajectories between U.S. and Canadian monetary policy create both opportunity and complexity for multi-jurisdictional fixed income portfolios.
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