Canada’s Spring Economic Update keeps the FY26-27 deficit projection close to Budget 2025 levels. Stronger revenues are used to fund CAD 37.5bn of new measures.
The Debt Management Strategy keeps Government of Canada bond issuance at CAD 298bn, while the stock of Treasury bills is reduced. The issuance plan includes CAD 110bn in 2-year bonds, CAD 80bn in 5-year bonds, CAD 80bn in 10-year bonds, CAD 24bn in 30-year bonds, and CAD 4bn in green bonds.
Market Reaction And Rates Performance
Market moves after the update were limited, with front-end rates about 1 basis point lower at most. Canada continued to lag the US in rates performance, alongside ongoing attention to geopolitical news flow.
Expectations remain for the Bank of Canada to keep policy unchanged through 2026 and move to a neutral stance in early 2027. The update did not alter the assumptions behind the bond programme or the policy path.
Given the Bank of Canada is expected to keep its policy rate on hold throughout 2026, volatility in the front end of the curve should remain low. We saw in the latest Statistics Canada report that core inflation cooled to 2.4% in March, giving the BoC cover to remain patient. This environment favours strategies that benefit from range-bound interest rates, such as selling options on CORRA futures to collect premium.
The government’s Spring Economic Update confirmed the bond issuance program laid out in the 2025 budget, which removes a key variable for the market. A predictable supply of $298 billion in new bonds helps anchor the market and supports our constructive view on Canadian fixed income. This stability is a marked contrast to the uncertainty we navigated back in 2025 when the central bank was still actively hiking rates.
Cross Market Relative Value
We continue to see Canadian bonds underperform relative to their U.S. counterparts, with the spread between Canadian and U.S. 2-year yields widening to 75 basis points last week. This divergence is largely driven by a more hawkish Federal Reserve, which is still grappling with higher wage growth in the United States. This presents a relative value opportunity for traders to position for a narrowing of that spread in the weeks ahead.
While the domestic picture appears stable, the market reaction to the economic update was muted because attention is focused on geopolitical headlines. These external factors remain the biggest risk and could introduce sudden volatility without warning. Therefore, while a steady domestic policy is the base case, using options to hedge against unexpected global events is a prudent strategy.
