Canada's domestic bond market is undergoing significant change, with record net bond supply reshaping its composition across sectors, credit quality and duration, according to National Bank of Canada.
Federal government bonds remain the primary driver of sales, making the market increasingly government-focused and diminishing the scarcity premium traditionally associated with Government of Canada (GoC) securities, the bank said in a note.
"With the GoC playing an outsized role, average issue size is growing," wrote National Bank Chief Rates and Public Sector Strategist Warren Lovely in the note.
The rising share of GoC issuance has improved the overall credit quality of the domestic bond market, with AAA-rated securities now representing almost half, or 45%, of index-eligible bonds, said the bank.
July's increase in bond yields pressured returns, with longer-term segments experiencing the greatest impact, such as provincial bonds. In fact, provincial bonds recorded a 2.3% monthly decline in July, lowering their year-to-date return to 0.4%.
On the other hand, "the corporate sector has seen some notable developments in 2026, with the introduction of large, multi-tranche 'hyperscaler' issues leaving a noted impact on subsector spreads and total returns," according to Lovely.