An important risk is quietly building beneath the surface that many Canadians may be overlooking, one that could accelerate now that Prime Minister Mark Carney has secured a parliamentary majority.

If investors want a preview of what may lie ahead, they do not have to look very far. The United Kingdom offers a useful comparison, not because the two economies are identical, but because many of the policy instincts now taking shape in Canada were first tested there, with clear consequences for government debt markets. The issue isn’t necessarily the intent but the outcomes, as markets ultimately respond to balance sheets rather than narratives.

The policy mix included aggressive climate initiatives, broader regulation, persistent deficits, centralized spending choices and higher taxes. None were introduced abruptly, and few were seen as problematic in isolation. Over time, however, their cumulative impact eroded investor confidence, especially at the long end of the

bond market

.

As a result, U.K. gilt yields no longer assume fiscal discipline or stable policy settings. Instead, they incorporate compensation for higher borrowing requirements, ongoing state involvement and the longer‑term costs of expansive policy goals imposed on an already heavy public balance sheet. As deficits persist, investors must absorb a growing supply of government debt, and bond investors demand higher

yields

for this risk.

Canada appears to be moving along a very similar path. Under the current Liberal government, carbon taxation remains a central policy lever, regulatory burdens continue to weigh on energy, mining and small businesses, and large deficit spending has become normalized even outside periods of crisis. These choices closely resemble policy frameworks already familiar to U.K. investors. The key difference is that Canadian bond markets have not fully adjusted, yet. Bond markets don’t always move in anticipation of policy change; they move once the results of those policies take root, which we at TriVest Wealth think will happen over the next few years.

The issue is that Canadian

government bond

yields remain strikingly low given the fiscal, economic and policy storm clouds gathering ahead. In my view, the bond market is pricing in a level of stability that no longer reflects the direction Canada is moving into under this government.

For an indication of the potential downside, the U.K. recently sold 10‑year government bonds at a yield of roughly 4.9 per cent, the highest level since the global financial crisis. Canada’s 10‑year bond, by contrast, still trades closer to 3.4 per cent. If Canadian yields were to adjust toward U.K. levels, investors in Canadian bonds would face a capital loss of roughly 10 to 12 per cent on what many still view as a safe asset. It is therefore worth asking how many Canadians would willingly accept a double‑digit drawdown in the portion of their

portfolio

designed primarily to preserve capital.

This brings us back to the importance of portfolio construction for Canadian investors. Many advisers continue to rely on the traditional 60/40 equity to fixed income framework, built on the assumption that bonds would reliably protect portfolios during periods of stress. The problem is they appear to have lost their risk-management ability in an environment defined by fiscal excess, currency risk and policy uncertainty.

Fortunately, investors are not without options. At TriVest Wealth, we currently hold no exposure to Canadian government bonds. Instead, we have replaced that allocation with principal‑protected

structured notes

and principal‑at‑risk notes linked to diversified equity indexes with meaningful downside buffers. Gold and commodities have also played an important role within our portfolios.

Government policy can have a material impact on a country’s economy. It does not have to define your portfolio.

Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc., operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning. The opinions expressed are not necessarily those of Wellington-Altus.

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