Sun Life Core Advantage Credit Private Pool

Market review

While 2025 began with wild swings and uncertainty, SLC Management ended the year looking past the noise. The common theme across all aspects of the Canadian bond market in the fourth quarter (Q4) was that "the trend is your friend." On the rates side, the yield curve steepened in Q4 in a continuation of earlier trends in 2025. The steepening was driven by both the short end of the yield curve reacting to the Bank of Canada (BoC) lowering rates again in Q4 for the fourth time in 2025, and by the longer terms of the yield curve continuing to rise to new heights. While the BoC was biased toward reacting to slowing growth, Canadian inflation was resilient in occupying the higher end of the BoC's target range. Combine this with global governments' bias for deficit spending and more bond issuance, and longer-term bonds felt the heat.

Canadian credit markets closed out 2025 on a positive note again, outpacing the U.S. credit market for the last two years. Lower-rated issuers continued to outperform higher rated issuers both in Q4 and overall in 2025, with the communications sector showing the most strength across the curve. While the macro environment was mildly positive and credit fundamentals remained relatively unchanged, elevated nominal and real rates have led to consistent inflows into the Canadian credit market. In addition to investors reaching for yield, issuers such as telecommunications companies continued to tender their regular senior bond issues and then issue rating-agency-friendly hybrid (subordinated) securities in their place. Both investor inflows and issuer tenders helped propel the corporate bond new issue market to record issuance in 2025, with lower than usual new-issue pricing concessions.

Amid cracks, growth to hold up

If there is one word to describe last year, it was "resilience." And forecasters are banking on much of the same in 2026. In the face of tariffs and growth scares, countries, businesses and households found ways to manage and mitigate several shocks last year. But this year we are in a more fragile state. 

Across North America, 2026 GDP growth is expected to hit 2%, with Canadian estimates around 1.2%. Canada has progressed in arresting inflation, while the U.S. is still struggling to contain it and will likely take well into 2027 to get closer to its target. Meanwhile, the Euro zone is expected to grow around 1.4%, with China estimated at 4.5%. Inflation is well contained in the Euro zone. In China, prices are falling and have been for a while, as large government perks led to overproduction while domestic demand remains weak. However, China's exports have proven more robust than anticipated as the country persuades the U.S. to hold off on tariff threats and continue negotiating. While China's exports to the U.S. are down over the year, its global exports are up as it increases trade to other areas, particularly Africa. Nevertheless, expectations are that China's domestic demand and inflation will remain relatively muted this year.

Eyes on the Fed while the BoC and ECB are more settled

Markets expect the U.S. Federal Reserve [KM1] (Fed) to sustain long-term growth, however stubborn inflation complicates any rush to get there. Inflation is running hot while job creation cools. With both moving in opposite directions, the Fed is conflicted - helping one may potentially exacerbate the other. But for now, it seems more concerned about labour weakness.

Meanwhile the BoC has steadily progressed to bring inflation under control. While Canadian growth has slowed, as tariff policy still hangs over markets, expectations are to return to more normalized growth levels in the second half of the year. The European Central Bank (ECB) also finds itself in a comfortable place as inflation stabilizes and overnight rates settle close to target.

Sovereign debt level running high

The global debt burden keeps growing as politicians continue to win elections by touting populist agendas and increasing spending. Japan is the most recent case. Here, the traditional party that held sway for decades lost ground to parties that promised tax breaks and perks.

While that playback may win elections, bond investors see it as troubling, with debt levels continuing to grow. Japan is not alone. Its global peers, including the U.S., are in the same boat. Markets are already reacting. Rates on 30-year debt across the G7 are high. And governments now need to be more tactical when issuing bonds as investors show less appetite for longer-term debt. There is no definite debt level at which markets lose confidence in a developed economy. But the longer that deficits persist and governments lack fiscal discipline, the more expensive borrowing becomes, which starts to hamper economic growth.

Fund Review

Over the quarter, the Sun Life Core Advantage Credit Private Pool (the “Fund”), Series F, underperformed its benchmark, the FTSE Canada Universe Bond Index by 15 basis points (bps) (gross of fees) in Q4. Duration and curve positioning in the quarter was neutral and as such added just 1 bp of alpha versus the benchmark.

Credit was the main driver of the underperformance with spread and asset selection detracting 16 bps of alpha, more specifically security section, which includes the active weight in USD bonds. According to Bloomberg indexes, Canadian corporate spreads tightened 4 bps, outperforming U.S. corporate spreads which widened 4 bps during this period. The Fund's bias to improve quality continued as it reduced U.S. corporate bonds in favour of Canadian exposure, with USD holdings ending the quarter at 5.7%, down again from 7.1% in the previous quarter. The Fund added to its Federal Real Return bonds and increased its Provincial weight with purchases in longer term Ontario and Québec bonds. The corporate bonds weight remained steady and included increased weights to financials and industrials sectors.