Corporate Bond Yields Increase for First Time in 14 Months: Canada Credit

Canadian corporate borrowing costs rose last month for the first time in more than a year after the Bank of Canada signaled it may raise interest rates as soon as June to curb inflation.

The interest-rate spread, or extra premium investors demand to hold corporate bonds instead of government debt, rose to 125 basis points, or 1.25 percentage points, on April 30. The spread widened seven basis points in April, the first monthly increase since February 2009.

“Typically higher interest rates are not good for corporate bond performance,” Robert Follis, head of corporate bond research at Bank of Nova Scotia’s Scotia Capital in Toronto, said in a telephone interview. “The ultimate impact is going to be dependent on the magnitude of the Bank of Canada increases over the next six to nine months.”

Corporate bonds declined 0.06 percent last month, paring the return this year to 2.17 percent, according to Bank of America Merrill Lynch data. The index tracks 685 bonds from issuers including Manulife Financial Inc., Canada’s largest insurer, and BCE Inc., the country’s biggest telephone company.

A rebound in economic growth has investors betting Bank of Canada Governor Mark Carney may raise rates at the next scheduled announcement on June 1. Statistics Canada reported on April 30 that gross domestic product grew 0.3 percent in February, the sixth straight monthly gain.

Carney said twice last week that the bank’s dropping of its conditional commitment to keep rates unchanged until July was “a tightening of monetary policy.” He added that “going forward, nothing is pre-ordained” and said “the extent and timing of any additional” tightening will depend on the outlook for growth and inflation.

Employment Report

Elsewhere in credit markets, Ontario sold 750 million Norwegian kroner ($127 million) in 3 percent bonds maturing in May 2013. Capital Desjardins sold C$900 million ($884 million) in 5.187 percent bonds maturing in May 2020. The debt was priced to yield 154.5 basis points more than government bonds.

Statistics Canada will deliver its April employment report on May 7. Economists surveyed by Bloomberg expect the jobless rate to hold steady at 8.2 percent.

Bond yields are also widening because the supply of new debt is increasing from companies, and as federal and provincial governments sell bonds to finance their deficits.

Canadian companies raised C$28.8 billion in the first four months of 2010, up from C$15 billion in the same period a year ago. Governments sold C$26.3 billion, compared with C$32.3 billion, according to data compiled by Bloomberg.

Still, corporate bonds aren’t likely to decline much further, Follis said.

“We’re not going to give back all the gains of last year,” Follis said. “We expect to see spreads stabilize and move sideways in the next couple of months as rates begin to rise because there’s still not enough supply of new bonds to meet cash availability.”

To contact the reporter on this story: Rob Delaney in Toronto at robdelaney@bloomberg.net;

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