In my late teens, my dad and I rebuilt a 1968 Mustang from the ground up. It wasn’t just a bonding experience, it was a masterclass in patience, precision and purpose. I learned about the mechanics, the bodywork and the art of breathing new life into something old. But more importantly, I learned the value of modifying legacy systems with modern solutions.

We didn’t restore the car to win races, we restored it to make it safer, more reliable, and fun to drive. We added disc brakes, new suspension, fuel injection and proper seat belts to that Mustang. It was still a great drive, but a heck of a lot safer.

That same philosophy applies to

portfolio construction

today, especially

when it comes to bonds

. The

old playbook

is no longer working.

It’s time to upgrade

.

We’ve been steadily reducing our

sovereign debt exposure

in both Canada and the U.S., and that decision is proving increasingly prudent. The U.S. bond market is now in a historic 62-month drawdown, the longest in recorded history. Meanwhile, companies such as Microsoft Corp. have their bonds trading at lower yields than U.S. Treasuries. That’s a clear signal the market is losing confidence in government credit quality.

And it’s not hard to see why.

Here in Canada, our

federal deficit

is projected to exceed $360 billion between 2025 and 2028, nearly triple last year’s budget forecast. The Parliamentary Budget Officer has called this “shocking” and “unsustainable,” noting that federal debt is now growing faster than the economy, a first in 30 years. Despite job cuts in Ottawa, spending remains elevated and quickly returning to 2020 highs. What’s more concerning is the reframing of

deficit spending

as “investing.” That may sound politically palatable, but it doesn’t change the math.

This isn’t just a Canadian problem. Governments around the world are increasingly treating budget constraints as optional, and central banks are being asked to mop up the consequences. But the bond market is pushing back.

Meanwhile, the U.S. government entered its 11th shutdown on Oct. 1, furloughing about 800,000 federal employees and leaving another 700,000 working without pay. This has created a data vacuum that will make it even harder for the Federal Reserve to steer monetary policy. The U.S. deficit remains between six per cent and eight per cent of GDP, with interest payments now consuming 14 per cent of the federal budget. The Treasury’s reliance on short-term debt adds rollover risk at higher rates, a dangerous game in a rising rate environment.

This isn’t a temporary dislocation; it’s a regime shift. Investors must adapt to a world where fiscal discipline is eroding and traditional safe havens are no longer safe.

Gold markets are already taking notice, with prices pushing past US$4,000 an ounce last week. Think of gold as your financial EKG: It’s warning us that a heart attack may be looming. And what do governments do? They keep loading up on carbs (deficit spending) and say everything’s fine because they’ll take statins (cut rates). But the bond market isn’t buying it.

That’s why we’ve replaced our bond exposure; not with corporate bonds, which are trading at credit spreads near 27-year lows, but with structured notes. These instruments offer asymmetrical payoff profiles, embedded downside protection and the ability to generate income in

volatile markets

. They’re like the disc brakes and fuel injection we added to that Mustang: modern solutions for legacy risks.

Structured notes have allowed us to maintain exposure to market upside while protecting against downside volatility. They’ve been particularly effective in this environment of persistent higher rates, albeit coming down a bit, fiscal uncertainty and geopolitical tension.

We believe investors need to stop treating their portfolios like museum pieces. Just because something worked in the past doesn’t mean it’s safe today. Bonds used to be the seat belts of a portfolio but now, many of them are fraying under the pressure of poor fiscal management and distorted monetary policy. It’s time to upgrade. Not just tweak. Not just rebalance. Upgrade.

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We’re entering a new era, one where fiscal discipline is fading, market signals are flashing red and traditional risk management tools are losing effectiveness. Investors need to rethink their approach. Structured notes, gold and modern defensive strategies are no longer niche, they’re necessary. We’re not just managing money, we’re modifying legacy systems to make them safer, more reliable and built for the road ahead.

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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