With the TSX and U.S. stock markets hitting new highs, some investors are looking to bonds as a buffer against late-cycle volatility. Rising equity option volumes and cracks in consumer credit have renewed attention on fixed income as a defensive play.
BNN Bloomberg spoke with Rose Devli, portfolio manager at Dynamic Funds, who said attractive running yields and policy uncertainty make bonds a timely tool for portfolio diversification.
Key Takeaways
- U.S. bond yields have declined from early-year highs, delivering strong returns for investors.
- Higher yields continue to provide attractive running income without requiring a recession to perform.
- Market exuberance in equities, especially in tech, signals late-cycle conditions and volatility risk.
- Cracks are appearing in lower-tier consumer credit, though mostly contained to weaker private loans.
- The Fed is expected to cut rates further as labour market risks rise, supporting the case for bond exposure.
Read the full transcript below:
MERELLA: The TSX today just won’t stop hitting intraday highs — as mentioned, above 30,600 and now at 30,622. But is now the time for investors to look toward bonds to protect against any potential downturn? Let’s go to Rose Devli, portfolio manager at Dynamic Funds. Thanks for joining us today.
ROSE: Thanks for having me.
MERELLA: So through the stock market surge, what’s been happening in the bond markets?
ROSE: It depends on the geography, but let’s talk about the U.S. Since the beginning of the year, yields have actually come down, which is surprising given all the talk about inflation and equity highs. People don’t always realize bond markets have rallied from those January and April highs, depending on where you are on the yield curve.
For example, we saw highs in the U.S. 30-year after Liberation Day when the VIX was around 50 or 60, and everyone thought long bonds were going to seven, eight or nine per cent. We saw that tip off at about 5.15 per cent, and now it’s down around 4.75, which seems a little sticky.
Here in Canada, we’ve seen a bit more volatility in yields. We entered the year at lower rates than we’re at today, and yields have oscillated around current levels. There’s still a lot of uncertainty — tariffs, trade tensions with the U.S., and potential fiscal stimulus around that November policy date Governor Carney mentioned. But we still see value in the bond market, particularly when you consider what’s happening in the U.S. Many of our active ETFs, including DXP, have benefited from those higher yields. We expect yields to hold around here or move slightly lower into year-end.
MERELLA: OK, so let’s talk about the U.S. government shutdown, which is still ongoing. There’s concern, as you mentioned, with data being delayed coming out of Washington. How is the market interpreting all of this?
ROSE: That’s the big question everyone’s talking about. It’s really a standstill in terms of where we’re getting our data since official agencies aren’t releasing updates. Some private sources help, but they’re not as reliable as what we see from the Bureau of Labor Statistics.
There are, however, some flags to watch. For example, Oct. 15 is when the military should be paid, so hopefully the shutdown ends by then. At Dynamic, we think it could last longer — possibly into November. We’re relying on alternative and private data to fill the gaps for now.
MERELLA: Why do you think the shutdown could last even longer? What are you watching?
ROSE: We’re watching the divide between Democrats and Republicans. It seems both sides are motivated by different priorities, and getting to an agreement will take time. It looks like everyone’s pretty dug in right now. Of course, things can change quickly, but our concern as bond investors is that this shutdown could drag on longer than previous ones.
MERELLA: You’re also watching cracks emerging in consumer credit. What have you noticed?
ROSE: Yes, we are. Right now, we think it’s mostly idiosyncratic in the private credit space. What’s coming out of companies like Tricolor and First Brands, and some of the smaller or mid-tier auto parts and auto lenders, has us paying attention. But for now, we think it’s limited to the lowest end of the credit spectrum — the triple-C-rated loans. Those don’t perform well when interest rates come down, especially since many were issued at tight spreads.
It’s not a great environment for private credit, though stronger deals are still fine. It’s that lower tier that raises questions.
MERELLA: OK, let’s talk about rate cuts. What’s your outlook?
ROSE: We do think the Fed will cut at its next meeting. A lot has already been priced in for 2026 — around five additional cuts. We could see the Fed funds rate moving from about 4.25 per cent to around 3.5 per cent, maybe lower. The market’s pricing closer to three per cent, but that would require more cracks in the labour market.
The risk is that when U.S. labour markets roll over, they tend to do so quickly and non-linearly. That’s why it’s so important to pull from every available data source, even private ones, because employment is the key indicator right now.
MERELLA: Right, that’s what the Fed has been watching too. When it comes to bond yields, are you saying investors should lock in longer maturities?
ROSE: I wouldn’t necessarily rush into the very long end. We’ve told clients we’d consider buying around that 5.5 per cent area, but after the rally we’ve seen, the seven- to 10-year part of the curve makes the most sense.
Higher yields aren’t necessarily bad for a bond portfolio — it’s all about timing. Higher yields mean higher running income. Right now, yields around four to five per cent, depending on the curve, are great. The U.S. Aggregate Bond Index is up more than six per cent year-to-date on a risk-adjusted basis — that’s an excellent return.
Given the late-cycle exuberance in equities, if investors don’t already have some bond exposure, now’s the time to consider it.
MERELLA: All right, Rose, we’ll leave it there. Appreciate your time. Rose Devli, portfolio manager at Dynamic Funds.
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This BNN Bloomberg summary and transcript of the Oct. 6, 2025 interview with Rose Devli are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.