Q3 2025 Fund Commentary

Market commentary

While headline inflation was flat during the quarter, measures of core inflation remained stubbornly elevated at the higher end of the 1–3% target band. The breakeven curve remained flat, reflecting expectations that near-term inflation had returned to being in line with long-term expectations. Breakeven rates increased across the curve through the first two months of the quarter but fell in September. This fall came as the overnight interest rate was cut, signaling the U.S. Federal Reserve Board saw inflation risks as less urgent.

Performance

Underweight exposure to a real return bond issued by the Government of Canada (4.25%, 2026/December) contributed to performance as it underperformed. Underweight exposure to a real return bond issued by Government of Canada (3.0%, 2036/December) detracted from performance as it was the strongest-performing federal inflation-linked bond.

Overweight exposure to provincial inflation-linked product contributed to performance. The sub-advisor holds the position because of the rarity of the product and for the additional yield it provides. Security selection within provincial inflation-linked bonds detracted from performance. The Fund holds an overweight position in Province of Quebec bonds, which were the weakest performers.

Portfolio activity

The sub-advisor increased exposure to provincial bonds as withdrawals were completed using federal holdings. The Fund’s holdings were trimmed across the curve in response to client withdrawals.

Outlook

The sub-advisor will continue to manage the Fund’s duration (sensitivity to interest rates) and positioning in conjunction with the view on interest rates. There are no large moves planned due to lack of issuance in the product and reduced liquidity in the space.