C.J. Chua: Welcome to our podcast series, Checking In, Looking Ahead. In today's episode, we're talking about public fixed income. In particular, we're discussing the outlooks for investment grade (IG) and non-IG credit, securitized assets and the institutional investment market as a whole. I'm C.J. Chua, Senior Director of Client Relationships at SLC Management. Joining me is Randall Malcolm, Senior Managing Director and Portfolio Manager of Public Fixed Income at SLC Management; John Fekete, Managing Director and Head of Tradable Credit at Crescent Capital Group; and Geoff Caan, Senior Managing Director and Portfolio Manager of Insurance Asset Management at SLC Management. Thanks everyone for joining us today. Let's start off by talking about Canadian bond investors. Randall, can you explain the major differences between Canadian and U.S. markets from a domestic investment perspective?
Randall Malcolm: Sure. Thanks, C.J. You know, the U.S. makes up about a quarter of global GDP in nominal terms, but the bond market in the U.S. makes up about 40% of the public bonds outstanding globally when you consider both government and corporate securities. So, why the difference? The difference goes beyond the size of the U.S. market. Really, the U.S. economy has been much more traditionally funded by public markets. Liquidity also attracts liquidity here. I think the U.S. has become the most prevalent of the markets here just because the liquidity that’s drawn in the public markets has been very positive. And it's really kind of a catalyst to draw in more liquidity. As well, you've really got a got a free market here. It's really supported by a stable regulatory and legal system. It's really similar to Canada in this respect, and I think sometimes we do take for granted when we look globally at different bond markets, that a bond is really a bond in all countries, it does differ somewhat. Having the similarity between the two markets is certainly a positive thing. You do get the size difference. But really, in addition to the size, you're getting other differences as well. When you think about liquidity and diversity, Canada's much more of a buy-and-hold market. When Canadians look to the U.S., they can get better market depth when we're trading. And I think that's both a function of a much larger set of investors in the U.S., but also a larger set of counterparties available to us in the U.S. as well. And then the diversity: you've got diversity by issuer, by sector, by ratings and also by security type. In terms of issuer, you've got a deeper set of issuers in the U.S. as well as a lot of global issuers accessing the U.S. market as well, in U.S. dollars. In terms of sectors, you're getting more diversity. When we access the U.S. market, Canadian investors cannot get access to sectors like the technology sector or the health sector that really don't exist in Canada's bond market. And the ratings aspect of what Canadian investors can access in the U.S. market is really one that's kind of overlooked. When we look at in the longer term, we can see much better ratings available in the U.S. market. We can buy corporates in the U.S. market: it has a pretty good selection of corporates that are AA- or AAA-rated in the U.S. market, which we really don't have in Canada anymore. But also in the shorter terms of the U.S. market, they have much more high-quality issuers than Canada does, including AAA securitized. When we look at the securitized market in the U.S., I mean it's multiple times greater than the total size of the Canadian bond market and it's highly rated as well. So again, there's a sector that we don't have in Canada. In summary, what Canadian investors are getting out of the U.S. market is that you're expanding your scope in terms of your universes for security selection. And we can often find securities with potentially superior risk–reward characteristics relative to what we might find in our in our domestic market, simply by expanding our universe.
C.J. Chua: Thank you for that, Randall. Geoff, turning over to you, can you provide more details on the meaning of securitized investments?
Geoff Caan: Sure. Thanks, C.J. So, the securitized market has been in existence for close to a century, but it's in the past 50 years that it's really gained traction. It's here to bridge the gap between the traditional credit markets, the corporate bond market, and the market where investors really have specific risk–return needs. And I'd say there's three aspects to the securitized market that differentiates it from the credit market. Firstly, it's a pooling of the assets and these assets are generally loans, but they could be to different individuals. Think home loans or auto loans: different people have different exposures but are pooled into the same group of assets. And secondly, with this pool of assets, you're transformed through a legal structure into some tradable bonds via securitization. And each of these securitizations are distinct from each other. The secret sauce is the third aspect, the tranching of the risk: that allows multiple investors the ability to gain exposure to one distinct asset pool, but at different levels of risk. You may have the senior classes that have a lower and more remote chance of a default risk versus the higher risk, those tranches that are first exposed to losses would have the highest yield but also the highest risk. And that really is what differentiates the market, and it’s created to give the core idea that one size doesn't fit all. You need to cater to different investors’ needs.
C.J. Chua: Let's turn it over to narrowly syndicated credit. John, maybe if you can give us a little bit more explanation about this asset class, what makes it so interesting now?
John Fekete: Sure. Great to be with you, C.J. And maybe this is a little bit of a pivot from Randall and Geoff. We're talking here about non-IG-rated credit, so things that are typically rated BB and lower. We're talking about the core middle market in terms of company size. These are senior secured bank loans generally with secondary liquidity focused on core middle market borrowers. We find that allocators often use the strategy as a complement or alternative to private credit or alongside things like high yield bonds and syndicated loans. The coupons here are floating rate, so they generally are based off of the secured overnight financing rate (SOFR) and they reset every 90 days. As I mentioned, we consider the borrowers to be core middle market. What does that mean? It’s usually defined by earnings before interest, taxes, depreciation and amortization (EBITDA) size. So, for a company that has EBITDA between US$50 million–200 million, that's generally considered to be the core middle market. Anytime you're talking about a senior secured loan strategy, you're talking about first-lien priority on collateral, which is great for downside protection.
What makes these loans different than broadly syndicated loans or high yield bonds is that they're lightly syndicated to a small group of lenders, or a club – that’s how I like to think about it. There's secondary trading liquidity, so the strategy can be accessed in an evergreen format. It's also insurance friendly, because the loans generally feature credit ratings from all the major rating agencies like S&P, Moody's and Fitch. So, it is an interesting space right now in particular because it tends to be overlooked. Most managers in the high yield and bank loan universe concentrate their portfolios in the largest index constituents. Narrowly syndicated credit, it's really a full spectrum approach, meaning that there's exposure to the entire bank loan asset class, which includes the middle market, smaller index-eligible members, where there's generally less competition. I've even heard some investors call this “liquid direct lending.” You can kind of get the idea of similar-sized companies but in an open-ended evergreen-type format. The yields today in this space are around 9% (source: Bloomberg). For those that follow credit, you know that's much higher than you would find in high yield bonds or broadly syndicated loans. And finally, I think it’s worth highlighting the deployment potential is something that investors really get attracted to. Narrowly syndicated credit typically takes about 90 days to ramp up a new managed account compared to something like private credit or other less liquid asset classes; those can take up to three years to deploy. So, there's a great advantage here in terms of deployment and high yield.
C.J. Chua: John, thanks for clarifying that you're describing the below-IG sector. Another component of the below-IG space is collateralized loan obligations (CLOs). Could you outline the CLO market and the potential benefits for investors?
John Fekete: That's another interesting area and that one actually crosses both worlds. And what I mean by that is you can invest in things that are rated below-IG like BB, but you can also invest at the top of the capital stack in AAA-rated CLO debt bonds. So, you really have a lot of flexibility there. It's probably, in what I would call a “tight spread world,” one of the last places left where investors can earn, let's say, a mid-to-high single digit yield for a liquid, mostly IG-rated asset with low credit risk. For those that aren't familiar, a CLO is simply a structure, and the underlying assets are a diversified portfolio of corporate senior secured loans, somewhat similar to the loans I was just talking about. CLOs can play a really important role in a portfolio because they have low correlation to traditional fixed income asset classes like corporate bonds. They also have very high Sharpe ratios and low interest rate duration, so they can provide a natural hedge, if you will, against interest rate volatility. We see investors use CLOs to complement their core bond portfolios, often when they're constructing portfolios. There's also the added benefit of higher yields at each credit rating. What I mean by that is, let's say a BBB-rated CLO typically can offer 150 basis points or more in yield than a comparable rated BBB-rated corporate bond. So, there is an advantage there. The senior levels like AAA and AA are highly liquid. Historically, you've never seen any defaults there. If you move into the kind of middle part of the stack – BBB, single A – there's good relative value opportunities. This is a trillion-U.S.-dollar asset class, so we're not talking about a small niche of the market. We're talking about a very seasoned, mature and large opportunity. That's just my perspective. I think it would be great to get Geoff's view. Geoff is also investing in this space as well. It would be great to hear his perspective.
Geoff Caan: Thanks, John. CLOs are a very large segment of the securitized market that we invest in. It is floating rate, so there's benefits where you're not taking additional interest rate exposure. You are taking on spread exposure, but it does complement the some of the other investing within the securitized market. And the spreads, as John mentioned, are pretty attractive versus competing offerings through the asset-backed market or the commercial mortgage-backed securities market. I'd also add that these are actively managed pools of bank loans, so you do get the advantage of choosing the managers that you prefer, that have a very strong track records and in which you have confidence in their management abilities. That differentiates it a bit from some of the other structured products that are more static pools of assets that are created at issuance and then get either paid down or amortized over a period. So, CLOs are one of the few actively managed segments of the securitized market, which is often a benefit on that front. We do find multiple clients across different geographies utilizing CLOs for their portfolios. In terms of, as Randy mentioned, there's not a lot of these available for Canadian investors. So oftentimes you'll see Canadian investors attracted to the U.S. market just for the CLO exposure.
C.J. Chua: Great. Thanks, Geoff and John. Maybe turning it back to Canadian investors. Randall, I think you’re best to handle this question. How do you handle U.S. interest rate and foreign exchange risk when buying U.S. bonds for Canadian investors?
Randall Malcolm: Thanks for the question, C.J. You know, we've heard a lot about different alternatives in the U.S. market where Canadian investors can buy different types of fixed income, both from Geoff and John. One thing that investors do need to think about when they're buying foreign currency bonds is that they're also getting foreign currency risk, as well as foreign yield curve risk. And that can take on certainly different aspects for the return profile of their investments. If we think through the start of COVID through mid-2022, the U.S. government bond market was highly correlated to the Canadian market. And then post–mid-2022 it suddenly broke away, and all of a sudden U.S. government bonds underperformed Canadian bonds. Likewise, in late 2024, we saw the U.S. dollar appreciate against most other major currencies, including the Canadian dollar, only to subsequently sell off strongly in the early part of 2025. So, either of these events could result in fixed income returns that, number one, really didn't match the return on an investor's Canadian-dollar liabilities they may be hedging. But number two, the fixed income returns were really dominated perhaps by currency effects or by foreign yield curve effects. For institutional investors that are seeking superior returns from foreign fixed income, they really need to think about how they hedge these bonds when they're entering into the transaction. A lot of investors will look toward forward currency forwards in order to hedge. These will effectively hedge the currency, but they won't hedge the foreign rates risk very well because they're typically three-months-to-one-year products, and a lot of bond risk can be of five-year terms and longer. So, it's not an incredibly effective hedge, the FX forwards for the foreign yield curve risk. In some of our strategies, I mean we've taken a staple of the insurance business, which is the cross-currency cash flow hedge, and put a bit of a twist on it that suits a bit of a more active trading style for public bonds. A cross-currency cash flow hedge is certainly a mouthful. It's like a set of currency forwards that hedge each cash flow of a foreign bond. So, if you're to buy a foreign corporate bond, for example, in U.S. dollars, it would take each U.S. dollar cash flow and hedge that individual cash flow back to the Canadian dollar, thereby both hedging the currency exposure and locking in the yield curve risk and eliminating the foreign yield curve risk to a great extent. These can be expensive to put on and they're generally a hold-to-maturity product. The twist that we put on it is to make it a similar product but using a DV01 hedge. And what that means is we look at a U.S.-dollar portfolio of corporates holistically and hedge for every basis point of change in that portfolio. We will hedge for a basis point of change with our hedges. So, the basis points effectively match up. And really what we get there is, number one, we're creating a synthetic bond – a synthetic U.S.-dollar corporate bond. It effectively transports that risk back to Canadian dollars, it translates the yield curve exposure back to Canadian dollars. And it really gets us the credit exposure that we're looking for. That gets us the return and the diversification. But we're eliminating the FX risk and we're eliminating the foreign currency or the foreign yield curve risk. And really what that does is it transforms a U.S. corporate into almost a synthetic Canadian corporate bond. The benefit of this type of a hedge is the low cost when we do transact, as long as we're transacting in the U.S.-dollar market. For example, selling a tech bond to purchase a health care bond of a similar duration, there is no adjustment required to our hedge. So, this type of hedge really expands the investment universe for a Canadian investor in terms of credit and in terms of that credit diversification and value add, but it takes away those foreign currency and the yield curve risks to a large extent. One thing you can avoid, though, is that when you're expanding your investment universe, you do still need to have credit insight into that universe. Now, C.J., let me turn this around for a second and ask you a question. Given what we've covered so far, what are you hearing from clients and prospects?
C.J. Chua: I think you've touched on some of the themes in your comments, Randall. But particularly for Canadian investors, since the corporate spreads have narrowed significantly, they start to question whether it makes sense to allocate more to Canadian corporates at this time. On the short- or mid-term of the curve, which are clients that are primarily in the property-and-casualty insurance or operating accounts, we see that there is that search for higher yield as interest rates have steadily come down. So, for those clients or investors that can allocate in the U.S., we see that there is a preference to shift some of the funds from Canadian corporate bonds to U.S. corporates and securitized investments. It does offer them better diversification, as you mentioned, in the different sectors and ratings, and all the while offering more volume and breadth relative to the Canadian market. And then on the mid and long end of the curve, which is where our pension and life insurance clients invest, we see them upping their risk profile in general with the goal of getting higher returns overall. We are seeing a shift from investing in IG credit to below-IG credit and even alternatives such as real estate and infrastructure. But even within the Canadian liquid investment grade allocation bucket, we're starting to see some of them increasing their targets ever so slightly and choosing to allocate some of those from the longer-duration Canadian corporates to the U.S. long-duration corporates. That said, though, investors are cognizant of the political and market dynamics that are continuing to play out in the U.S. with the impact of tariffs being in the forefront of their concerns and how this ultimately impact returns in Canadian-dollar terms. Now, I want to turn our attention back to the securitized space. Geoff, we have heard of a “specialized approach,” to U.S. securitized investments. What is it, and can you walk us through how it works?
Geoff Caan: Thanks, C.J. The securitized market does come with its pitfalls. As I described, each individual deal is separate and distinct from one another. So, it does require a different legal structure for each. This is a different payment priority and loss allocation, and all of these are laid out in a prospectus. There are a fair amount of hurdles to invest in securitized markets. This is one of the reasons why we think you're often offered additional compensation to invest in this asset class relative to a more traditional corporate or Treasury bond in the U.S. With the additional details each of these deals brings, you do find that it helps to have a distinct specialization within the securitized market – an analyst who may focus on the commercial mortgage-backed security sector or the asset-backed sector or other parts of the residential mortgage-backed sector. The market is large enough and deep enough for you to specialize in those different areas. And we feel it does provide value to get deeper into these areas to really find the hidden gems in these certain asset classes because oftentimes the additional work will pay off for investors.
C.J. Chua: Amazing. Thank you for that. And one final question for all three panelists. As you look to the remainder of this year and ahead to 2026, what is the biggest risk in your area of the market and how are you positioned to avoid these pitfalls? Maybe we'll start off with John.
John Fekete: I would say for me, the biggest risk I see right now is around monetary policy in the U.S. If the U.S. central bank is too slow in bringing interest rates closer to neutral, if a monetary policy might be too restrictive for too long, what that does is increase the risk of recession. This would bring with it higher credit defaults and potentially higher credit losses. So, this is something that I'm intently focused on right now. We've already seen a slowdown in the U.S. labor market as higher interest rates may have caused companies to either delay expansion or maybe postpone new investments. Our view is it's going to be very important for the U.S. Federal Reserve to take appropriate action to ensure the labor market remains constructive. How do we mitigate this risk? Well, we stress test every potential investment that we make during the underwriting process. So, before we put anything in the portfolio, we take a very conservative assumption that there will be no interest rate reductions in the future, meaning a company has to be able to cover its interest expense based on today's rates for the life of the loan, and we're not giving the benefit of any potential rate cuts in the future. We think this is one way to be pretty conservative around underwriting, and we also of course always have proper diversity in the portfolio. The design is one issuer would never derail an entire portfolio’s performance. So that's what's on our minds today.
C.J. Chua: Geoff, maybe you can give us some thoughts on that as well.
Geoff Caan: A big part of the securitized market is exposed to the U.S. consumer, either through loans to purchase autos or credit cards or even unsecured. One of the big concerns for us as a securitized investor is the performance of the underlying consumer. We have seen some cracks in that market, but if inflation still remains sticky and tariffs really start to weigh on to the consumer in terms of higher prices, you could see that performance get more broad-based. We could see defaults move further into the asset-backed market. And what we're doing to mitigate for that is doing a fair amount of, as John mentioned, similar stress scenarios across our investments. A lot of these stress scenarios mimic what happened in the Global Financial Crisis and, in some cases, go above that and ensure we have ample subordination. One of the aspects of securitized I mentioned was the tranching of risk characteristics, and we would focus on the higher rated tranches with more subordination, as protection against any increase in losses.
C.J. Chua: And finally, Randall, biggest risk and how are you positioned for it?
Randall Malcolm: I think we tend to think about the universe of securities here, and that includes the governments as well as the corporates. There's a lot of focus on corporate credit spreads and how tight corporate credit spreads are. But I think we also need to focus on the flip side of that, which is the governments’ side of the credit spread. You know, credit spread is always the corporate spread over the government funding level. And government funding has fundamentally been challenged. It was challenged through COVID. It will continue to be challenged as we as we find ourselves in a new situation in terms of global trade relationships and in terms of global defense relationships. So, we're funding an economic transition behind those changes in those relationships at a time really when budgets are already challenged. I think part of what we're seeing in the compression of those corporate credit spreads is really a lot of fundamental challenges on the government side. And there seems to be no easy way out, unfortunately. So, we do see a higher-quality corporate portfolio as a good defense against the deteriorating fundamentals of government.
C.J. Chua: Great. Thank you, Randall, John, and Geoff. That's all the time we have for this episode of Checking In, Looking Ahead. For more information, visit slcmanagement.com. Thanks for listening and have a great day.
Sources: Bloomberg, Standard and Poor's, 2025. Content was recorded on October 14, 2025, and reflects views of the participants as of that date. SLC Management terms “expert” and “expertise” based on the level of comprehensive knowledge possessed by SLC Management investment specialists in a given sector of the private credit and/or real assets market.
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