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Canadian Corporate Spreads to Extend Best Streak This Decade (1)
2017-06-28 14:11:56.579 GMT
By Maciej Onoszko
(Bloomberg) — Spreads on Canadian-dollar corporate bonds are set to extend their longest narrowing streak in seven years as a recovering economy is bolstering appetite for the country’s riskier debt.
Investment-grade spreads over federal bonds tightened two basis points from April to June, the fifth straight quarter of narrowing according to Bloomberg data going back to 2010, as a slowdown in issuance this month offset a flood in May. The corporate bond index is on track for the sixth gain in seven quarters.
“Investors are still starved for yield, and with the Canadian economy performing reasonably well, overall corporate creditworthiness is not a concern,” said Jeffrey Herold, chief executive officer at Toronto-based asset manager J. Zechner Associates. “Spreads are as tight as they have been since the financial crisis but could tighten further based on pre-crisis spread history.”
Investors are loading up on corporate bonds in the Canadian dollar as the nation’s economy is estimated to grow 2.5 percent this year, outpacing other developed peers. Their appeal is additionally burnished by a spike in federal government bond yields after the Bank of Canada signaled an increase in interest rates.
Better Opportunities
Government bonds are losing favor globally after European Central Bank President Mario Draghi said on Tuesday that deflationary forces have been replaced by reflationary ones.
Adding pressure on Canadian government bonds, Bank of Canada Governor Stephen Poloz reiterated late yesterday the central bank may be considering higher interest rates.
The yield on Canada’s five-year government notes rose to a three-month high of 1.29 percent on Wednesday, taking the increase this quarter to 18 basis points. For comparison, the rate on Royal Bank of Canada’s 1.968 percent deposit note due in March 2022 rose 11 basis points in the same period.
Canadian corporate bonds are on track for a return of 1.8 percent this quarter, the highest in a year. That compares with a 1.4 percent return for Canada’s government bonds, according to indexes compiled by Bloomberg.
“There’s still going to be demand for credit, which will suppress risk premia,” said Aubrey Basdeo, head of Canadian fixed income at BlackRock Inc. Yet, given how tight the spreads have become, he sees better opportunities outside of Canadian credit, such as emerging market bonds.
Canadian companies sold C$8 billion ($6 billion) of securities this month, the least for June since 2012, after a record C$15.2 billion in May, led by foreign issuers. The biggest deals in June included sales of deposit notes by Bank of Nova Scotia and HSBC Bank Canada.
“It was really the heavy new issue calendar that dragged spreads out in May,” Jason Parker, Toronto-based head of fixed- income research at BMO Capital Markets, said by phone. “Issuance has slowed down in the past couple of weeks, so it’s given the market time to consolidate, absorb the supply and then get back on its original trajectory.”