CIO explains why cost of borrowing has become a flashpoint for Canadian pensions in US markets under Trump's tax bill
US President Donald Trump’s newly passed “big, beautiful” tax bill may be designed to fuel short-term growth in the US, but Canadian pension funds with large US exposure are recalibrating their risk lens, particularly around borrowing costs and long-term rate pressures.
According to John Delaney, Trump’s latest tax bill is less of a major policy shift and more of a continuation of the tax cuts introduced during his first term, cuts that disproportionately benefit corporations and high earners, emphasizing it’s important to understand the bill is “primarily a continuation” rather than a structural overhaul. He also underscored the bill will largely support equity markets, particularly US stocks, which have already been the focus of growth-oriented strategies.
“The short-term tax impacts, particularly on corporations and high earners, [are] pro-growth,” noted Delaney, CIO at WTW Investments. “You could think of that as Mag Seven or different types of corporate debt that are potentially still attractive because yields remain elevated relative to recent history.”
As a result, the extension of Trump-era tax cuts will likely support short-term economic growth, which benefits both Canadian and US pension investors, added Delaney, who said the bill avoids the disruption that might have occurred had those cuts been allowed to expire.
“There is an aspect of this that we would expect to be positive for short-term GDP growth,” he said, noting that allowing the cuts to lapse could have triggered a slowdown in corporate activity across the US economy.
While the bill may offer short-term support for growth, Delaney questions the long-term trade-offs. That’s why he urges pension investors to look beyond the immediate bump in market sentiment and consider the structural risks of persistently high US debt as he doesn’t see the new tax legislation directly increasing the tax burden on pension-held assets. Instead, he’s focused on what he calls a looming “debt overhang,” driven by the US government’s ballooning deficit.
He acknowledged the tax bill isn’t really triggering major shifts in portfolio strategy as institutional investors, including pension funds, aren’t making wholesale asset allocation changes purely in response to the legislation. Rather, one of the most critical factors institutional investors will be tracking going forward is the cost of borrowing, particularly as US debt levels continue to climb.
Delaney underscored this has direct implications for Canadian pensions with US exposures, especially those tied to high-growth companies. He noted that if interest rates remain elevated or rise further, this could put pressure on companies seen as key growth drivers in institutional portfolios.
Additionally, cost of borrowing is a critical factor for both the companies pension funds invest in and the pension plans themselves, Delaney acknowledged. Lower borrowing costs help companies grow, manage debt more efficiently, and preserve profitability. But if rates rise, that equation changes.
On the pension side, higher interest rates can actually reduce liabilities, which may seem beneficial. However, Delaney cautioned that the overall impact depends on how well a fund’s assets can withstand rate increases.
“If you get to scenarios where new financing is at higher borrowing costs, that obviously puts more stress on the borrower,” he said. “Higher interest rates aren’t the worst thing for pensions, provided that your entire portfolio doesn’t get too negatively impacted.”
Equity holdings are notably vulnerable because rising rates tend to slow economic growth and erode future earnings. Delaney said pension investors should model different interest rate paths over the next three to ten years and ensure they can meet obligations even in less favorable scenarios.
“Everyone’s gonna monitor very closely cost of borrowing and how that's impacted by overall debt levels,” he said. “How does a world of current interest rates, that's sustained for longer than necessarily the market was planning on, play into the growth case or the upside case for those companies?”
While it’s difficult to forecast with certainty, he warned that investors need to be mindful of how sustained borrowing costs could erode future returns and weigh that risk in their allocation strategies.
Ahead of the Fed interest rate meeting on Wednesday, Delaney urged pension investors to pay close attention to interest rate trends, especially as pension liabilities are valued using a market discount rate.
Whether rates stay flat, drop, or begin rising again will significantly affect both liabilities and asset valuations. A long-term rise in rates, he cautioned, could pose challenges for asset growth, whereas higher borrowing costs typically slow down corporate expansion; an outcome that’s counterproductive for pension portfolios relying on equity returns.
He recommends that pension funds strike a careful balance, maintaining equity exposure for upside while capturing high-yield opportunities where they exist. Above all, institutional investors need to “be wary about how much interest rate sensitivity they have in their assets,” he said, noting the long-term uncertainties stemming from the bill.
