Daniel Kelly
Senior Portfolio Manager
August 3, 2026
Inflation concerns have come and gone throughout the past year. At the end of 2025, the consensus was that interest rates would continue to fall in 2026. Earlier this year, expectations shifted toward possible rate increases and, more recently, toward rates remaining largely unchanged. These changing expectations have made fixed income a challenging asset class over the past several months.
Strategy Update Highlights
1.We expect inflation and interest-rate uncertainty to continue, driven by Middle East tensions on oil prices and almost never-ending changes in tariff policy.
2.Approximately 25% of our Canadian equity exposure is protected through September 18th. We expect to add protection to a portion of our U.S. equity exposure.
3.U.S. and Canadian interest rates are now expected to remain flat for 2026—for now, at least. (Sarcasm intended.)
Fixed Income
Interest rates moved up and down over the past quarter, contributing to continued bond-market volatility. Elevated geopolitical tensions and, to a lesser extent, tariff uncertainty increased volatility. Bond markets stabilized and partially recovered through much of the quarter before selling off again near the end of June.
Given the uncertainty, rate cuts may be delayed or may not occur in 2026. In Canada, current expectations are for the Bank of Canada to remain on hold through the remainder of the year.
We maintained our overall fixed income exposure. Within the allocation, we continued to roll short-term Government of Canada bonds for liquidity.
We continued allocating to long-short capital-gains focused alternative fixed income strategies. Capital gains are taxed at half the rate of interest income, providing a tax advantage.
We are considering adding bond exposure like we had in 2023, specifically US$ Treasury notes maturing between July and October 2027, yielding between 0.375% and 0.50%, costing around $96.74, maturing to $100. For people in the maximum tax bracket, the after-tax equivalent return is 6.43% to 6.51%. You would need a taxable US$ GIC paying above that to beat that return.
This positioning reflects our focus on maintaining flexibility in the face of recent interest rate volatility and after-tax efficiency in a changing interest-rate environment. Our fixed income strategy continues to include a combination of exchange-traded funds, actively managed mandates, and alternative strategies.
Equities
Over the second quarter of 2026, our equity positions rallied. Canadian banks and insurance companies moved to new highs, while resources traded lower and then began to gain again. As most of our bank and insurance company holdings reached new highs, we took some profits to reduce some exposure. Software companies rallied off their lows as investors realized AI is not going to replace all software anytime soon. We expect continued software and technology sector volatility due to AI.
We currently maintain approximately 25% downside Canadian equity protection against a 12% decline or greater until September 18th.
Trade policy uncertainty, combined with geopolitical developments in the Middle East, continues to increase market volatility and risk. With the Canada-Mexico-USA free trade agreement not being renewed, we expect more short-term uncertainty and noise.
We are underweight equities and hold elevated short-term and liquid fixed income investments, allowing us to deploy capital as opportunities arise. While this may modestly impact short-term returns, it helps reduce volatility—an important consideration, particularly for newer clients.
Given ongoing geopolitical and renewed trade uncertainty after the Canada-US-Mexico free trade agreement not being renewed, we maintain a cautious view.
Conclusion
We continue to manage portfolios with a disciplined and watchful approach and will actively seek opportunities in the quarters ahead.
Thank you for your continued trust and confidence. Please don’t hesitate to reach out—we are always available by phone, Webex, or in person.
** Here’s the fine print and there’s a lot of it…
Currency can add return when the Canadian dollar goes down but reduce returns when the Canadian dollar goes up for non-currency hedged US and international investments. Also, please remember that your US accounts report values in US dollars.
Securities or investment strategies mentioned in this newsletter may not be suitable for all investors or portfolios. The information contained in this strategy update is not intended as a recommendation directed to a particular investor or class of investors and is not intended as a recommendation in view of the particular circumstances of a specific investor, class of investors or a specific portfolio. Options, and other strategies mentioned, may not be suitable for all investors. You should not take any action with respect to any securities or investment strategy mentioned in this newsletter without first consulting your own Portfolio Manager or in order to ascertain whether the securities or investment strategy mentioned are suitable in your particular circumstances. This information is not a substitute for obtaining professional advice from your Portfolio Manager. The commentary, opinions and conclusions, if any, included in this newsletter represent the personal and subjective view of Daniel Kelly who is not employed as an analyst and do not purport to represent the views of RBC Dominion Securities Inc. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. Investment Trust Units are sold by RBC Dominion Securities Inc. There may be commissions, trailing commissions, management fees and expenses associated with Investment Trust investments. Please read the prospectus before investing. Investment Trusts are not guaranteed, their values change frequently, and past performance may not be repeated. (Keep reading, there’s only 7 more sentences to go.) This commentary is based on information that is believed to be accurate at the time of writing and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under licence. ©2026 Royal Bank of Canada. All rights reserved.
Investment portfolios are not guaranteed, and past performance is no indication of future returns. In addition to these portfolios not being a guaranteed investment, there can also be significant fluctuations in the value of the portfolio. Has anyone read this far?