Canadian Bonds Worse Than Greece as Traders See Rate Rise: Canada Credit
Canadian bonds are the world’s worst performing sovereign debt in July, lagging behind the embattled securities of Greece, Spain and Portugal, as investors bet policy makers will raise interest rates next week for a second time in less than two months.
Government debt maturing in more than one year has lost 0.96 percent since June 30, the worst returns among the 26 countries according to Bloomberg data. That compares to a 1.6 percent return for Greek bonds, 1.5 percent for Portuguese debt and 0.8 percent for those of Spain, the countries at the center of Europe’s sovereign debt crisis.
The declines may not be over, with the spread between the Bank of Canada policy rate and two-year bond yields more than three times the average of the past 10 years. The gap narrowed to 122 basis points yesterday from 157 basis points on May 31, the day before Governor Mark Carney lifted the policy rate to 0.5 percent and said future rises are “not preordained.” The spread’s mean is about 38 basis points since April 2000.
“The risk is future rate hikes start to become increasingly priced into the market, and the front end of the curve sells off as a result,” Mohammed Ahmed, a strategist at Canadian Imperial Bank of Commerce, said by phone from Toronto. “It’s going to be difficult for Governor Carney to be more dovish than he has been up until now.”
The yield on two-year bond dropped as much as 53 basis points since May 31 to 1.34 percent. It ended yesterday at 1.72 percent. Ahmed predicts the yield may rise to as high as 2 percent.
Bond Auction
Elsewhere in credit markets, the extra yield investors demand to own Canadian corporate rather than federal government debt ended yesterday at 144 basis points, unchanged from the day before, according to a Bank of America Merrill Lynch index. Overall yields rose to 4.07 percent.
Canada auctioned C$3 billion ($2.9 billion) of bonds maturing in 10 years, drawing an average yield of 3.418 percent. The government received bids of C$6.8 billion for the 3.25 percent securities maturing in June 2021, according to a statement on the Bank of Canada’s website.
Ontario sold C$600 million of 4.65 percent bonds maturing in June 2041. The debt priced to yield 89 basis points over government benchmarks.
Traders have slashed bets on the speed of rate increases this year. Before Carney’s June 1 statement, trading in overnight indexed swaps showed chances of a 25-basis-point increase at the July, September, October and December meetings were 75 percent, 100 percent, 100 percent and 50 percent, respectively, according to CIBC implied-probability data. Those numbers yesterday stood at 90 percent, 65 percent, 45 percent and 45 percent.
“Tighter Monetary Policy’
Policy makers doubled the target rate June 1 from a record low of 0.25 percent and said future moves would depend on the pace of growth in Canada weighed against signs of an uneven global recovery and the potential effects of European government deficits. Since then, a Statistics Canada report showed employers added 93,000 jobs to payrolls last month, about five times more than economists on average expected. Policy makers next meet on July 20.
“You have to maintain a short bias because the domestic fundamentals argue for tighter monetary policy,” Ahmed said.
Canadian bonds are still up 3.61 percent so far this year. The debt of Greece, Portugal and Spain has slumped 18 percent, 4.2 percent and 1.6 percent, respectively, during the same period, Bloomberg data show.
To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
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