Canadian debt market: Key trends and insights

Q3 2025 report

The Canadian debt market experienced strong growth in Q3 2025. Year-to-date (YTD) loan issuance reached $1.8 trillion — a 10 percent increase over Q3 2024. This growth was driven by the demand for new money, with the real estate sector taking the lead followed by the wholesale and retail sector.

Bay Street powers through tariff turbulence

Canada’s capital markets delivered one of the strongest first halves in a decade despite uncertainties arising from the proposed U.S. Liberation Day tariffs and Big Beautiful Bill. Canadian markets completed 502 deals in the first six months of 2025, with total dealmaking reaching an impressive $310 billion YTD — driven by a surge in M&A, equity issuances, and debt financing. Canadian companies and investors also doubled down on both domestic and cross-border transactions.

While the broader economy remained uncertain, one thing was clear: Bay Street isn’t waiting.

This momentum is fueled by continued confidence in Canada’s capital markets and overall economy. Global and domestic capital providers view Canada as a steady ship in turbulent waters. This market agility reflects a renewed confidence in Canada’s economic fundamentals and the adaptability of Bay Street players.

The resurgence of private equity (PE) has been a major driver of this activity. Global PE is sitting on $1 trillion of dry powder. Canadian PE-led buyouts rose 259 percent and exits surged 333 percent in 2025, as PE took advantage of adjusted valuations, lower interest rates, and deployed capital.

Access to diverse funding sources also played a key role, with strong participation from Canadian banks complemented by the rise of private credit. Additionally, sweeping government aid and support initiatives helped Canadian businesses pivot toward global markets.

Looking ahead, Canada’s capital markets may face growing pressure from global headwinds and domestic cooling. However, if recent performance is any indication, Bay Street is prepared to meet the moment with bold moves, strategic clarity, and a relentless focus on value creation.

Private credit becomes a lifeline for Canadian businesses

Private credit emerged as a vital support system for Canadian business owners and entrepreneurs amid the uncertainty of the past year. Private lenders continued to play a pivotal role in financing growth and navigating volatility in the first half of 2025, with a focus spanning:

• Asset-backed finance (e.g., equipment leasing, accounts receivable, and inventory financing),
• Higher-risk commercial real estate,
• Infrastructure and long-duration project finance, and
• Distress lending, including debtor-in-protection (DIP) loans.

An estimated $5 trillion to $6 trillion in assets could migrate to non-bank lenders over the next decade, reshaping the lending landscape. Collaboration between banks and private lenders is an emerging trend. Banks are increasingly providing operating lines while partnering with private credit providers for specialized financing such as real estate and equipment.

The rise of Canadian family offices as influential investors and lenders across asset classes is adding to this momentum. After a slowdown in 2021, family office investment is rebounding. Globally, deal values rose 14.8 percent from 2023 to 2024, while deal values in Canada climbed 16 percent. Though many built their wealth through real estate, the trend is shifting toward diversification into direct investments, startups, and M&A.

Expect private credit and family offices to play an even greater role in shaping Canada’s capital markets as their reach continues to expand. They will continue to fill funding gaps, drive deal flow, and redefine how businesses access growth capital.

Canada’s banks make bold deals and reshape the market

Canada’s banking sector delivered stronger than expected results in Q3 2025. These results were fueled by lower provisions for credit losses, solid revenue growth and wider margins supported by higher lending rates, and resilient deposit growth.

Beyond the numbers, the bigger story is the unprecedented consolidation occurring within the sector. There has been more M&A activity in the Canadian banking sector over the past two years than in the past two decades:

• March 2024: RBC acquired 100 percent of HSBC Bank Canada in an all-cash deal valued at $13.5 billion.
• June 2024: National Bank agreed to acquire Canadian Western Bank via a share-swap valued at $5 billion.
• August 2024: Scotiabank acquired a 14.9 percent stake in KeyCorp, a U.S. regional bank, in a US$2.8 billion deal aimed at unlocking collaboration across payments, wealth management, and investment banking.
• 2025: ATB Financial acquired Cormark Securities Inc., strengthening its investment banking capabilities.
• Most recently: Rumors suggest RBC and BMO are considering a $2 billion sale of Moneris.
• Private credit is also active: Brookfield and Birch Hill teamed up to acquire First National Financial in a $2.9 billion all-cash deal.

The trend is clear: banks are leveraging M&A for regional and cross-border expansion. Scotiabank’s U.S. investment signals a shift toward strategic alliances rather than full acquisitions.

Looking ahead, expect Canada’s financial sector to continue its aggressive transformation driven by consolidation, cross-border ambitions, and a race to build scale and capability in an increasingly competitive global market.

Canada’s economy more resilient than declining GDP suggests

Canada’s GDP declined for the third straight month in June 2025, marking the first such streak since late 2022. Overall, Q2 2025 GDP fell 1.6 percent year-over-year, according to Statistics Canada. This was primarily driven by a slowdown in the manufacturing sector and a reduction in machinery and equipment spending.

While the numbers appear discouraging at first glance, a closer look suggests the economy is more resilient than the headline data implies. Much of the Q2 2025 GDP decline reflects normalization following a surge in Q1 2025, when businesses stockpiled goods in anticipation of incoming tariffs. However, household demand has remained resilient despite ongoing trade pressures. Consumer spending increased 4.5 percent in Q2 2025, while housing investment increased 6.3 percent, driven by a slight rebound in residential construction and new home building. This indicates that Canadians are still spending, even amid a softer job market and ongoing economic uncertainty. Government spending also provided an additional boost to domestic demand.

In conclusion, the GDP data points to an economy caught between the weakness contributed by the trade war but strengthened by strong domestic demand.

U.S.-Canada trade relations: Have trade tensions eased?

Tariff turbulence continues to impact the global economy. Canada has avoided large-scale retaliation so far but faces uncertainty ahead. The Bank of Canada laid out three scenarios:

• Baseline (current tariffs): Growth rebounds to 1 percent by late 2025 and inflation returns to two percent.
• Tariff relief: Growth accelerates to two percent and inflation dips below two percent.
• Trade war: Growth slows further and inflation spikes above 2.5 percent before easing.

An unexpected benefit from the Canada-U.S. trade tensions is that all provinces have acknowledged the need to enhance interprovincial trade. While important steps have been taken towards this goal, progress hasn’t been uniform.

Recently, federal Bill C-5 has passed, with the intent of removing federal barriers to interprovincial flows of goods, services, and labour. However, much of the necessary heavy lifting falls on the provinces.

So overall, a wait-and-see approach for the future with diversification as the best defense.

What’s ahead for Canadian capital markets?

The Bank of Canada has lowered its key interest rate by 2.50 percent over the past year, aiming to ease borrowing costs and stimulate economic activity. However, we must look south to the U.S. to truly understand the path ahead for Canadian interest rates and the broader economy.

The U.S. economy continues to wrestle with persistent inflation. Although the Federal Reserve held firm and resisted rate cuts for the first half of 2025, they gave into mounting pressure from markets and political voices in September 2025 and initiated a 25-basis point decrease in their overnight rate. Looking ahead, the Fed has signaled additional cuts in 2025 despite inflation proving stubborn and the impact of tariff uncertainty still unfolding.

Canada’s inflation appears more contained in contrast, yet expectations remain sticky. Canadian capital markets have shown robust deal activity, and the job market continues to demonstrate resilience. These signs indicate that the current rate environment still supports growth. However, GDP growth is slowing, and early signs of economic cooling are emerging.

While the U.S. economy shows resilience, it is also trending toward slower growth. Taken together, these dynamics suggest that the Bank of Canada is likely to adopt a cautious approach in the months ahead.

While Canada’s capital markets have shown resilience, the road ahead is paved with uncertainty. Expect deal making to continue at a cautious pace. Capital will continue to be available but for investments that are supported by strong assets. Overall, the future is driven by a market that rewards strategic clarity over bold ambition.