Elevated levels of cash and short-term assets on Canadian institutions’ balance sheets highlight the need for a middle-ground solution.
Read this article to understand:
- The traditional options for idle cash on balance sheets
- Why the two options are not ideal
- Our approach to enhancing portfolio resilience for better overall outcomes
The question is where to keep money secure and accessible without leaving it idle
Canadian institutions are holding more in cash and short-term assets than they have in years. For balances that are held for one or two years, the usual two options – cash and short-term bonds – are not ideal, creating a need for a middle-ground solution.
Canadian bond yields are now well above their post-crisis range. That has not made life easier for investors holding cash and short–term assets. Rates have moved farther and faster than in the past, while credit spreads are also tight. The question is where to keep money secure and accessible without leaving it idle.
Yields are back, and so is volatility
The past few years have delivered six major supply-led disruptions. Each one has caused rates to move and put pressure on inflation.
Figure 1: Six major supply-led disruptions shaping markets
Source: Aviva Investors, as at October 2026.
The cumulative effect? Yields have returned, but so has persistent volatility. Government of Canada bond yields and the Canadian overnight repo rate average (CORRA) swap rates have both moved sharply since 2021. Figure 2 shows the change in yields and how much they have moved.
Figure 2: 5-year Government of Canada yields versus 5-year CORRA swap rates (per cent)
Past performance is not a reliable indicator of future results.
Source: Aviva Investors, Bloomberg, as at September 29, 2026.
The cash quandary…
For funds that are held for a year or more, overnight rates are an expensive way to stay safe
Many Canadian institutions are carrying more cash than they have in years. Large property and casualty (P&C) insurers can hold cash and short-term allocations around the mid-teens’ percentage. Pensions plans hold cash for capital calls against private debt allocations and collateral requirements. Foundations and endowments maintain cash reserves to fund spending, while corporates retain cash for strategic projects and other future capital expenses.
Each position has a purpose behind it. The question is not whether to hold cash, rather how much of the balance needs to be available tomorrow and how much is held at the overnight rate out of caution. For funds that are held for a year or more, overnight rates are an expensive way to stay safe.
…but short-term bonds carry duration
The usual step up from cash is short-term bonds. While the bonds earn more over time, they introduce interest rate risk. A typical short-term bond fund has a duration of two to three years and when yields rise, it falls in value.
The arithmetic is simple. At a duration of around three years, a one percentage point rise in yields lowers the price by roughly three per cent. With annual income on a short-term portfolio in the low single digits, a rise of a little over one percentage point is enough to wipe out a full year's income.
That risk has materialized this year. Five-year government bond yields rose through the spring and at their peak the capital loss on a short-term bond portfolio was enough to eradicate a year’s income.
Figure 3 shows the increase in the yield of five-year Government of Canada bonds since the start of the year. Yields hit a low of 2.498 per cent on April 4, but reached 3.718 per cent on September 24 – a rise of more than 120 basis points (bps) in just a few months.
Figure 3: 5-year Government of Canada yields year-to-date (per cent)
Past performance is not a reliable indicator of future results.
Source: Aviva Investors, Bloomberg, as at September 29, 2026.
What about adding credit?
Adding credit to earn more return is not going to help either. Public credit spreads sit at or near their historical tights. The compression has gone furthest in the lower-rated bonds, whose spreads have moved close to those of provinces and agencies.
That leaves investors with little compensation for the extra risk. With spreads this tight, there is more room for them to widen than to narrow further, and lower-rated bonds tend to suffer most when they do. Reaching down in quality or out along the curve to pick up yield could expose short-term money to losses just when it may be needed most.
A short-dated, highly rated portfolio can absorb a meaningful widening
Tight spreads argue for the short end, not against it. The thinner the spread, the smaller the widening needed to erase it, and the further out or lower down a portfolio sits, the more a given widening costs. At the short, high-quality end, the spread earned is modest, but the cushion around it is largest relative to that spread. A short-dated, highly rated portfolio can absorb a meaningful widening before a year of excess returns is lost.
The gap in between
For money that is held for 12-24 months neither cash nor short-term bonds is an ideal solution:
- Cash earns the overnight rate, the income from which can fall when the Bank of Canada (BoC) cuts interest rates
- Short-term bonds add duration, and a rise in yields can wipe out a year’s worth of income
- Reaching for yield in lower-rated credit adds spread risk, with little extra reward while spreads are this tight
One option gives up the returns that idle money could earn, while the others add interest rate and credit spread risks that the money was never meant to carry. The middle ground is an asset that offers a spread over cash without needing a view on rates.
A strategy to fill that gap
There is no magic bullet, but there are strategies that come close. The Aviva Investors’ ReturnPlus strategy is one. It’s neither a money market fund nor a short-term bond fund, and the difference is intentional – it was designed to sit between the two.
The ReturnPlus strategy is a purpose-built structure with a distinctive position between cash and conventional investment grade credit. It is a liquid, actively managed, high-quality portfolio intended to generate a return over cash without the main sources of volatility that often accompany credit allocations.
Key features of ReturnPlus
- No interest rate/duration exposure. The strategy is not locked into current government yields. When rates rise it does not take the loss a short-term bond fund does.
- High-quality, short-dated credit. The strategy's sensitivity to spreads moves is materially lower than that of lower-rated alternatives. If/when spreads widen, the profit and loss impact is muted.
- A clear target over cash. The strategy targets CORRA plus 75bps (gross).
- High breakeven spread protection. The strategy aims to deliver a reasonable breakeven spread, which can help provide a cushion before spread widening erodes income.
- Liquidity. The portfolio invests in liquid bonds, preserving the ability to reallocate if spreads widen meaningfully.
- Capital efficient for insurers. Short-dated, highly rated credit sits at the low end of OSFI's Minimum Capital Test credit risk factors.* Hence, the measure that matters is return per unit of required capital, not the coupon alone. On that basis, a modest spread at a low capital charge can compare well with longer or lower-rated credit that pays more. As a Canadian dollar strategy, it may also help branches of foreign insurers meet OSFI's vested-asset requirements.
* Office of the Superintendent of Financial Institutions.
The return is not free. The strategy carries spread risk that cash does not, and it is best suited to money that can stay invested for a year or two and ride out a period of wider spreads.
To put a spread over cash in context, on a CAN$100 million balance, 75 basis points is CAN$750,000 a year, before fees. For an institution holding several hundred million in cash and short-term investments, moving even part of it will meaningfully change the income on balances that are otherwise earning only the overnight rate.
Figure 4 shows how ReturnPlus measures up against other short-term strategies.
Figure 4: How the strategy compares
|
| A money market fund | Aviva Investors ReturnPlus strategy | Aviva Investors short-term bond strategy | Aviva Investors short-term private debt strategy |
|---|---|---|---|---|
| Return target | CORRA | CORRA + 75bps | FTSE + 40bps | CORRA + 200bps |
| Duration target | Zero | Zero | Benchmark | Zero |
| Liquidity | Daily | Daily | Daily | Monthly* |
| Used for | Operating cash | Cash needs six months - two years | Get some duration exposure plus carry | Harvesting illiquidity premium |
Target returns are shown gross of fees which would reduce returns, hypothetical, not guaranteed and may not be achieved.
Note: *Subject to fund terms.
Source: Aviva Investors, as at October 2026.
Applications for investors
The distinctive characteristics of the Aviva Investors’ ReturnPlus strategy mean it can be deployed across multiple areas.
Figure 5: Key applications of the ReturnPlus strategy
Source: Aviva Investors, as at October 2026.
Conclusion
Yields have returned but so has persistent volatility. Holding cash preserves capital but delivers only the CORRA rate. A short-term bond fund may offer higher returns, but it also introduces interest rate risk. With credit spreads currently at their tights, the reward for assuming their risk is limited.
Given these options, the ReturnPlus strategy becomes a more compelling choice. The strategy delivers short-dated, high-quality exposure with no interest rate risk. It earns a reasonable spread over CORRA and is liquid for when the money is needed.
