Home Sweet Home: 3 Reasons to Go Long Canada, Short U.S. Credit (Beyond Tariffs)
Home is where the heart is. And for 2025, home—in this case we’re talking about Canada—may be the place to be when it comes to credit exposure. We see an especially compelling case to be long Canadian credit/short U.S. credit. For advisors, we think this might be one area in 2025 that can lead to meaningful outperformance for clients.
Here’s why:
1. The Canadian Credit Market Now Offers Greater Opportunities
Canada’s credit market has evolved in recent years with the arrival of new, innovative structures. Take Limited Recourse Capital Notes (LRCNs) from banks and insurance companies, for example. First issued in 2020, issuance for these securities grew to just shy of CA$20 billion two years later and they continue to gain traction among investors. The domestic credit market has also gained greater depth and diversity as issuers who previously relied on bank lending have begun issuing bonds for the first time.
2. Compared to the U.S. Market, Canada Exhibits Higher Credit Quality and Lower Volatility
Higher risk-adjusted returns are the goal—and Canada’s credit market may deliver quite the assist in 2025. Indeed, Canadian credit currently seems well-positioned vs. the U.S. With both markets currently trading at similar credit spreads, we believe this creates an opportunity to be long Canadian credit and short U.S. credit. Additionally, foreign exchange hedging costs have risen significantly in recent months, making it less attractive for Canadian investors to hold U.S. dollar-denominated assets.
Figure 1: It’s All Relative: Canadian Credit is Currently More Attractive Than the U.S.
Source: Bloomberg L.P. Canada HY is represented by the ICE BofA Canada High Yield Index, US HY is represented by the ICE BofA US High Yield Index.
3. The Macro Outlook Supports Long Canada/Short U.S. Credit
Our 2025 macroeconomic outlook adds fuel to the case for being long Canadian credit/short U.S. credit. In a nutshell, we anticipate continued central bank policy divergence and believe the Bank of Canada has more scope to ease policy vs. the U.S. Federal Reserve.Our Long Short Credit strategy can serve as a fixed income diversifier or traditional bond replacement by maintaining low correlation to major markets and mitigating rate, credit and currency risks with hedging tools.
This material has been published by Picton Mahoney Asset Management (“PMAM”) on February 24, 2025
It is provided as a general source of information, is subject to change without notification and should not be construed as investment advice. This material should not be relied upon for any investment decision and is not a recommendation, solicitation or offering of any security in any jurisdiction. The information contained in this material has been obtained from sources believed reliable, however, the accuracy and/or completeness of the information is not guaranteed by PMAM, nor does PMAM assume any responsibility or liability whatsoever. All investments involve risk and may lose value. This information is not intended to provide financial, investment, tax, legal or accounting advice specific to any person, and should not be relied upon in that regard. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.
This material may contain “forward-looking information” that is not purely historical in nature. These forward-looking statements are based upon the reasonable beliefs of PMAM as of the date they are made. PMAM assumes no duty, and does not undertake, to update any forward-looking statement. Forward-looking statements are not guarantees of future performance, are subject to numerous assumptions and involve inherent risks and uncertainties about general economic factors which change over time. There is no guarantee that any forward-looking statements will come to pass. We caution you not to place undue reliance on these statements, as a number of important factors could cause actual events or results to differ materially from those expressed or implied in any forward-looking statement made.
Commissions, trailing commissions, management fees, performance fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Alternative mutual funds can only be purchased through a registered dealer and are available only in those jurisdictions where they may be lawfully offered for sale.
There is no guarantee that a hedging strategy will be effective or achieve its intended effect. The use of derivatives or short selling carries several risks which may restrict a strategy in realizing its profits, limiting its losses, or, which cause a strategy to realize or magnify losses. There may additional costs and expenses associated with the use of derivatives and short selling in a hedging strategy.
This material is confidential and is intended for use by accredited investors or permitted clients in Canada only. Any review, re-transmission, dissemination or other use of this information by persons or entities other than the intended recipient is prohibited.
© 2025 Picton Mahoney Asset Management. All rights reserved.
