Equity and Bond Markets Show Divergent Performance in 2026, Rebalancing Advised

By the Editorial Team · Wednesday, September 30, 2026

In 2026, Canadian investors with balanced portfolios face a widening performance gap as global equities like the iShares Core Equity ETF Portfolio (XEQT) rise 14.5% while bond funds such as the iShares Global Government Bond Index ETF (XGGB) fall 5.4% due to rising interest rates and inflationary pressures. This divergence is prompting calls for portfolio rebalancing toward shorter-duration bonds or cash equivalents to manage risk amid ongoing market volatility and elevated government debt concerns.

In 2026, investors maintaining balanced portfolios between equities and bonds are encountering significant challenges due to divergent market performances and underlying economic pressures.

The iShares Core Equity ETF Portfolio (ticker: XEQT), a Canadian-listed exchange-traded fund offering broad global stock exposure hedged to Canadian dollars, has delivered a strong gain of 14.5 percent so far this year. Conversely, the bond market has experienced notable setbacks amid rising interest rates and inflation concerns. The yield on the 10-year U.S. Treasury bond recently surged past 5.2 percent, reaching a 19-year high. This spike reflects broader difficulties in the government bond sector, driven by inflationary pressures, elevated debt levels, and increased bond issuance, particularly by large technology firms.

These dynamics have negatively impacted bond-focused investment vehicles. The iShares Global Government Bond Index ETF (ticker: XGGB), which holds about 41 percent of U.S. Treasuries, has declined 5.4 percent year-to-date, excluding distributions. This creates an approximate 20 percentage point performance gap between stocks and bonds in 2026, highlighting the need for portfolio rebalancing for investors seeking to maintain their desired asset allocation.

Rebalancing strategies typically involve trimming equity positions and increasing bond holdings. Matt Manara, executive vice-president and portfolio manager at Avenue Investment Management, advises such adjustments for clients, particularly retirees who may hold a significant portion of assets in equities alongside bond allocations sufficient to cover several years of expenses.

While government bonds from the U.S. and Canada remain largely risk-free in terms of default, their prices may continue to face downward pressure amid persistent fiscal challenges. Some market analysts caution that elevated government debt levels and inflation could extend current stresses on bond valuations. Yet, maintaining heavily equity-weighted portfolios is not without risks, as equity markets have experienced increased volatility. The ongoing enthusiasm around artificial intelligence and strong performance in sectors like Canadian banking have driven up stock valuations, potentially raising concerns about sustainability.

To navigate these complexities, investors may consider shorter-duration fixed income instruments or money market funds less sensitive to interest rate fluctuations. Options include the Vanguard Canadian Short-Term Bond Index ETF (ticker: VSB), which invests in a diversified mix of government and investment-grade corporate bonds, and the BMO Short Corporate Bond Index ETF (ticker: ZCS), focused exclusively on corporate debt.

Investment approaches will vary based on individual risk tolerance and time horizons, underscoring the importance of customized portfolio strategies in the current environment.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.