NextFin News - Two of Canada's largest pension managers appeared together this week to confront the question that has seized global fixed-income markets: how do long-duration institutional investors fund themselves when the bond market they depend on is trading at levels not seen in 19 years? Ian Charest, vice president of treasury at La Caisse, and Charles Lesaux, head of funding at British Columbia Investment Management Corp., discussed how institutional investors use bond markets to manage funding, liquidity and balance sheets while supporting broader investment strategies, speaking at the 2026 Canadian Finance Conference on September 29.
The timing was the point. Two days earlier, the 10-year Treasury yield settled at 5.11% after touching 5.14% intraday, a level last seen in July 2007. The 2-year note climbed to 4.897%, its highest since 2023, while the 30-year yield reached 5.438%, a post-2004 peak. For the funding desks at Canada's biggest pension pools — the institutions that stand between illiquid investment books and hard cash-flow obligations — the message from the bond market is no longer theoretical.
The Funding Desk Is the Shock Absorber Nobody Watches
Pension funds are structurally mismatched by design. They invest in assets that take months or years to buy and sell — private equity, infrastructure, real estate, long-duration credit — while their liabilities and capital commitments come due on fixed schedules. The funding program is the bridge across that gap, and it is the first place a rate shock transmits into operational risk.
The transmission mechanism runs in three steps. First, rising yields mark down the market value of the assets that back a fund's debt program, weakening the collateral position even though the fund's long-term thesis is unchanged. Second, the fund's own new issuance must be priced at the higher prevailing rate, raising the coupon on fresh liabilities. Third, if the selloff is severe enough, the fund must choose between issuing into an expensive market, drawing on committed credit lines that carry their own costs and covenants, or selling assets — often the liquid ones first, which leaves the portfolio progressively more weighted toward the illiquid assets that cannot be sold quickly.
BCI's own funding architecture shows the model. Its medium-term debt program accesses debt markets to support client investment objectives, with debt obligations directly backed by investment assets rather than by a sovereign guarantee. The fund has emphasized Canadian-dollar issuance to align the denomination of its debt with the denomination of its liquid assets, a deliberate currency-matching discipline that reduces the risk of a funding squeeze when the Canadian dollar moves. The issuance calendar tells the story of a fund that has been steadily terming out its liabilities: C$2.25 billion at 4.90% due June 2033 (October 2023), C$3.00 billion at 3.40% due June 2030 (August 2024), C$3.00 billion at 4.00% due June 2035 (May 2025), C$3.50 billion at 3.25% due June 2031 (January 2026), and C$2.00 billion at 4.15% due June 2036 (August 2026).
That last issue is the tell. In August 2026, with the selloff already building, BCI still priced C$2.00 billion at a 4.15% coupon for a 10-year maturity — 15 basis points above the 4.00% coupon on the May 2025 issue of the same tenor. The cost of long-dated funding is climbing, and it is climbing into a market where the 10-year government benchmark now sits above 5%.
La Caisse brings the other side of the equation. Canada's second-largest pension manager reported net assets of CAD 517 billion as at December 31, 2025, on a 9.3% return for the year. Its treasury function, which Charest leads, has historically looked beyond domestic markets for funding — the fund has sought to establish itself as a regular issuer across currencies so it can raise capital wherever it is relatively cheap and maintain a diversified investor base. When the Canadian-dollar market tightens, that optionality is the asset.
Liquidity Comes From Where It Is Least Wanted
When public-market funding gets expensive, pension funds turn to the one source of cash that does not care about the Treasury yield: the secondary market for private assets. BCI is preparing to sell approximately US$2 billion of private-equity assets in the secondary market, according to people familiar with the matter. The transaction is expected to involve at least 17 fund interests, with the final size and composition dependent on buyer negotiations.
The sale is not an emergency move. BCI is a regular participant in the secondary market, having sold $1.6 billion of assets in fiscal 2024 and $1.5 billion the year before. The latest transaction fits a stated strategy: securing at least $5 billion in annual distributions from its $33.6 billion private-equity portfolio, which spans fund commitments, co-investments and direct holdings. Secondary-market activity itself has reached record levels, with transaction volumes hitting $54 billion in the first half of 2025.
"In the normal course of business, we routinely evaluate our portfolio holdings to ensure our clients benefit from optimal diversification," a BCI spokesperson said, noting that selling assets enables redeployment of capital into new opportunities.
But the subtext is a trade-off every funding desk understands. Selling private assets when public markets are under pressure means selling into a buyer's market, often at discounts to net asset value. Waiting, however, means funding the same cash needs by issuing debt at 5% instead of 3%, or by drawing on credit lines that carry their own covenants and costs. The cheaper source of liquidity is the one that requires giving up the most value — and the decision of which to use is the funding desk's central judgment call.
The trade-off is sharpened by the composition of the Canadian pension model. These funds are global leaders in the direct-ownership approach to private assets, which means their illiquid books are larger as a share of total assets than those of most peers. That structure boosted returns in the low-rate decade, when cheap funding amplified the spread between levered private assets and the cost of capital. It is the same structure that makes funding discipline the binding constraint when rates rise.
Why This Selloff Is Different From 2022
The 2022 bond correction was the strongest in 50 years, and La Caisse's 9.3% return in 2025 came against that backdrop. This episode has a different driver mix. Market-based longer-term inflation expectations have remained relatively contained, while real yields have risen substantially — meaning investors are demanding higher inflation-adjusted returns rather than simply pricing an uncontrolled acceleration in consumer prices.
"There is an important nuance behind the rise in yields," said Daniela Hathorn, senior market analyst at Capital.com. "It would be easy to attribute the move to renewed inflation fears following the Middle East energy shock, but the evidence suggests that is only part of the story."
Hathorn pointed to economic momentum as the second leg: the S&P Global purchasing managers' index showed the strongest business-activity growth in more than five years, alongside increasing capacity constraints and faster input-cost growth. "That combination tells bond investors that the economy may be capable of sustaining higher real interest rates than previously assumed," she said.
That distinction matters for pension funding because it changes the expected path of yields. A pure inflation scare eventually breaks growth and forces central banks to cut. A real-yield repricing driven by strong growth and heavy government borrowing is stickier — it does not self-correct through the business cycle. For a funding desk issuing 10-year debt, the difference between the two scenarios is hundreds of basis points of coupon over the life of the bond.
The Historical Playbook: 2020, 2019 and the Liquidity Buffer Lesson
The current stress has older echoes that funding desks remember. The March 2020 market seizure placed large demands on pension funds' liquidity buffers, and some of the money-market securities held in those buffers — bank deposit notes among them — experienced illiquidity and could not be sold when needed. The lesson was that liquidity buffers must be composed of assets that actually trade in stress, not just assets that are rated highly in calm.
The September 2019 repo-market spike offered a second lesson: funding strains can emerge from the plumbing, not just from asset values. When dealer balance-sheet capacity shrinks, even high-quality collateral becomes harder to finance, and the overnight rate can gap higher with little warning. A pension fund's funding desk lives in that plumbing every day — rolling commercial paper, managing credit lines, scheduling bond taps — and the cost of a seizure there is immediate even if the investment portfolio is sound.
The 2026 episode combines both lessons. Yields are higher because investors demand more compensation for duration and for uncertainty, and the liquidity of the assets backing those yields is being tested at the same time. A funding program built for the 2010s — cheap money, deep markets, reliable buffers — does not fit the 2020s without redesign.
The Counter-Thesis: This Is a Dislocation, Not a Regime
The strongest case against a structural read is straightforward: bond markets have spent the better part of two decades punishing anyone who declared the low-rate era over. Yield spikes driven by geopolitical shocks — the Middle East conflict driving energy prices higher in this episode — have a history of reversing once the immediate risk passes. The 10-year yield's move above 5% in a matter of weeks is the signature of a positioning unwind and a term-premium spike, not necessarily a permanent reset. If growth data softens and the geopolitical risk premium fades, yields could retreat toward 4.5% quickly, and funding desks that locked in 5% coupons would have overpaid for liquidity they did not need.
The answer is that both forces are present, and the funding desk must plan for the structural one while exploiting the cyclical one. Even if yields fall back, the volatility itself has a cost: funding programs must hold larger liquidity buffers, maintain more diversified issuance channels, and accept that refinancing risk is now a first-order concern rather than a back-office detail. A larger buffer is a drag on returns in any rate environment.
The falsifying signal is specific: if the 10-year Treasury yield closes below 4.50% for a sustained period of one month while measures of term premium normalize toward their 2019-2021 averages, the structural-refunding thesis is wrong and this episode should be read as a cyclical dislocation. Until then, the prudent assumption for a pension funding desk is that 5% is a floor to plan around, not a ceiling to fear.
What Comes Next: Three Horizons
In the short term, expect volatility and wider spreads. Funding desks will hoard liquidity, delay non-essential issuance, and lean on committed credit facilities. The funds most exposed are those with large illiquid books, thin liquidity buffers, and heavy reliance on short-term wholesale funding. The funds best positioned are those, like BCI, that have already been issuing steadily through the cycle and can point to a consistent issuer footprint. For them, the August 2026 tap was not a distressed move — it was a scheduled issuance executed into a market that was already moving against them, which is exactly what a disciplined funding calendar is designed to do.
Over the medium term, refinancing at higher coupons compresses net returns across the portfolio. A pension fund that funded at 2% in 2021 and must refinance at 4.5% in 2026 gives up 250 basis points of spread on every dollar — a drag that cannot be fully offset by asset-side alpha without taking more risk. The compression is mechanical: the liability side reprices faster than the asset side, and the gap shows up in net returns before it shows up in headlines. Funds with longer-dated fixed-rate debt locked in before the 2026 move will feel the pinch later; funds that relied on short-term instruments will feel it now.
In the long term, the structural leg dominates. The era of near-zero funding is over, and pension funds that rebuild their balance sheets for a 4-5% funding world — with diversified currency issuance, deeper liquidity buffers, and a disciplined secondary-market program — will compound through the cycle. Those that treat liquidity as an operational afterthought will find themselves selling assets at the worst possible prices.
The base case is that yields stabilize in the 4.5%-5.2% range and funds rely more heavily on secondary sales and cross-border issuance to manage cash needs. The upside case is that inflation cools and yields retreat toward 4%, easing funding stress and allowing issuance calendars to normalize. The downside case is that the 10-year pushes toward 5.5%-6%, forcing accelerated asset sales and wider spreads across the private-credit complex, where much of the Canadian pension model's return has been generated.
Three signals are worth watching: the monthly issuance calendars of CDPQ and BCI, which will show whether domestic or cross-border markets are being favored; secondary-market transaction volumes, which will reveal how much private-asset liquidity is being tapped; and the term premium embedded in long-dated Treasuries, which will indicate whether the move is cyclical or structural. A fourth, quieter signal is the spread between private-credit yields and comparable public credit — if it widens while secondary volumes rise, the market is telling investors that private-asset liquidity is being priced, not just bond-market liquidity.
The bond market is no longer a free source of patience for pension funds. It is a priced constraint, and the funds that treat liquidity as a strategic asset rather than an operational afterthought are the ones that will compound through the next cycle.
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