With 2025 now in the books, to say it was an eventful year feels like an understatement. From the early stages of implementing a new tariff and global trade regime in the spring, to the ongoing Russia–Ukraine conflict and continued tensions in the Middle East around Gaza, markets had a wide range of variables to digest. Corporate profits globally continued to rise, while most central banks around the world moved toward cutting interest rates, with the United States taking the longest to join the easing cycle. Although the Bank of Canada was among those cutting overnight rates, longer-term bond yields rose modestly in the fourth quarter, which translated into a slightly negative return of 0.3 percent in the final three months of the year.
For the full 2025 calendar year, Matco’s Diversified Income Fund returned 3.2 percent. Notably, our investment in CMLS commercial mortgages, yielding 7 percent, continues to enhance income distributions, which is particularly valuable as interest rates begin to decline. Overall, the fund generates a current yield of approximately 4.25 percent, and the difference between this yield and the annual performance can largely be attributed to the rise in longer-term interest rates, particularly those at the 10-year mark and beyond. The fund’s current yield of roughly 4.3 percent represents an approximate 2 percent premium compared to money market and GIC securities, which remains attractive for lower-risk investors seeking steady income, or for those patiently waiting for more favorable entry points into growth-oriented strategies.
Entering 2025, central banks were balancing stubborn inflation against slowing economic growth. By the end of the year, however, cooling labor markets in both the United States and Canada allowed for a shift toward stabilizing growth. Our base case outlook calls for further rate cuts through 2026, with Canada’s overnight rate declining to 1.75 percent by mid-year and 1.5 percent by year-end. In the United States, we expect the federal funds rate to ease toward 3.25 percent midyear and approximately 3 percent by December.
This environment favors positioning within the mid portion of the yield curve. As policy easing continues alongside elevated sovereign debt levels and inflation stabilizing in the 2 to 3 percent range, the likelihood of a steeper yield curve increases. In this context, long-duration government bonds appear less attractive, while high-quality investment-grade credit in the three to ten year range offers more compelling opportunities, including roll-down potential with lower duration risk.
With equity and bond returns now more closely correlated, income portfolios need to expand beyond traditional bond exposure. Incorporating corporate credit, mortgage strategies, stable dividend-paying equities, and private lending can help deliver more resilient cash flow while maintaining an element of downside protection.
