Canadian bond yields have climbed since the Iran crisis began: PwC

Canadian government bond yields have climbed since the Iran crisis began, but corporate spreads have held, a divergence that PwC Canada reads as a market worried about inflation rather than collapsing demand.  

The firm said long-term financing costs, rising since 2020, will likely stay elevated and could climb further, according to its 2026 mid-year M&A update, released June 23. 

That cost-of-capital backdrop frames a Canadian economy PwC expects to grow below potential, at 0.9 percent to 1.3 percent in 2026, before improving to 1.5 percent to 2.0 percent in 2027 if geopolitical and economic conditions stabilize.  

The firm projected inflation of 2.5 percent to 3.0 percent this year, worsened by the Iranian crisis, easing toward 2.0 percent through 2027 if disruptions subside.  

Consumer sentiment has continued to weaken, PwC said, while strong commodity prices have fuelled deals in the materials sector. 

PwC flagged two risks that could reshape the outlook.  

The firm said a prolonged period of uncertainty over North American free trade is likely, and that ongoing trade barriers or a longer-term departure from the Canada-United States-Mexico Agreement (CUSMA) would dampen investment in manufacturing and other sectors that depend on US sales.  

The absence of a comprehensive free trade agreement would risk a material decline in new investment into Canada, though PwC said the evidence points more to weaker or delayed investment than to large-scale capital flight.  

A re-escalation of the Iran war would likely push the global economy into a stagflationary recession, the firm added, and could drive Canada's annual inflation toward 4 percent to 5 percent and cause the economy to contract. 

Against that backdrop, deal activity stayed relatively steady.  

Companies announced 658 deals in the first quarter, PwC said, close to the prior year's quarterly average of 653 and just below the 671 recorded in the fourth quarter of 2025. 

Aggregate deal value totalled $64bn in the first quarter, down from each of the final two quarters of 2025 and below the 2025 quarterly average of $97bn.  

Average deal size eased to roughly $98m, compared with about $148m in 2025, which PwC attributed to fewer large transactions across materials, energy, utilities and financials. 

Materials, industrials and information technology remained the three most active sectors and together accounted for more than a third of all deals. 

Financials softened after gaining momentum in late 2025, while real estate transactions, driven mainly by private capital, hovered near 2025 lows but showed early signs of an uptick.  

Canadian activity stayed heavily oriented toward the US, with more outbound deals into the US than inbound into Canada, which PwC said makes the CUSMA renegotiation a key variable for the second half. 

Companies are acting instead of waiting for perfect conditions, said Sean Rowe, PwC Canada's national leader for deals markets and value creation.  

They are using deals to build scale, strengthen supply chains and add capabilities faster, he said. 

PwC pointed to energy, agrifood and insurance as the sectors defining the shift.  

In energy, the firm said the Iran conflict has pushed oil prices episodically to multiyear highs, benefiting Canadian producers but adding inflationary pressure that could raise borrowing costs for large deals.  

In insurance, carrier-level activity has reached levels not seen in years as foreign insurers reassess their Canadian operations, with PwC citing Definity's acquisition of Travelers Canada and Wawanesa's acquisition of Everest Insurance Company of Canada.  

In agrifood, the firm said climate volatility, geopolitical shocks and resource constraints are pushing companies toward consolidation and more resilient supply chains, and noted Farm Credit Canada's commitment of $2bn by 2030 to advance innovation in domestic agriculture and food.