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Company Bond Returns Trailing Stocks by Most Since February: Canada Credit
Returns on Canada’s corporate bonds are trailing gains in stocks this month by the most since February, as rising company profits lure investors to equities.
Debt investors have lost 0.44 percent on average in July, according to Bank of America Merrill Lynch’s Canadian Corporate Index, while the Standard & Poor’s/TSX Composite Index has gained 3.6 percent. Declines this month are being led by St. John’s, Newfoundland-based electric utility Fortis Inc., whose bonds have lost 1.76 percent, and Epcor Utilities Inc., which is down 1.59 percent.
Investors are pulling money out of bonds and putting it into stocks as the earnings at the more than 80 percent of companies in the S&P 500 that have reported second-quarter results so far top analysts’ estimates, and per-share profit has grown 54 percent, according to Bloomberg data. Canada’s government may say tomorrow that the economy accelerated in May, according to a survey of analysts by Bloomberg News.
“The capital markets have gone from basically a risk-off mode back to a risk-on mode, so bonds have lost some of their appeal to equities,” said Sheldon Dong, a vice-president of fixed-income strategy at Toronto Dominion Bank’s TD Securities unit in Toronto.
Diverging Returns
The 4 percentage-point difference in returns between bonds and stocks is the most since company debt trailed the performance of equities by 4.58 percentage points in February. Bonds are still doing better for the year, returning 3.96 percent, compared with a decline of 0.42 percent for the S&P/TSX index.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than the nation’s government debt rose to 151 basis points yesterday from 142 on July 27, according to the Merrill Lynch index. The spread averaged 149 basis points, or 1.49 percentage point, at the end of June.
Also, the province of Ontario increased the size of its 4.2 percent bond set to mature in 2020 by C$750 million ($722 million) to C$4.35 billion. It was the second time in a month the province lifted the size of the deal by that much.
Telus Corp. said it will redeem early $613 million, or 45 percent, of a $1.36 billion note due in 2011. The Vancouver- based telecommunications company said it will fund the redemption, set for Sept. 2, with the proceeds from its C$1 billion of 5.05 percent 10-year notes issued last week and from other credit.
Government Bonds
In the government bond market, the yield on the benchmark 3.5 percent bond due in June 2020 fell 3 basis points to 3.23 percent as its price rose.
The spread between the Canadian government 2- and 10-year bond yields held steady at 1.63 percentage points, after expanding from 1.51 percentage points, the slimmest margin based on closing prices since December 2008, on July 9.
Canadian home resale prices rose for a 13th straight month in May, the longest streak since September 2006, the Teranet- National Bank Composite House Price Index showed yesterday. Overall prices rose 13.6 percent from May 2009. The index has tracked home-price changes in six Canadian cities -- Calgary, Halifax, Montreal, Ottawa, Toronto and Vancouver -- since February 2000.
GDP Forecasts
The nation’s gross domestic product rose 0.2 percent in May, after stalling in April, Statistics Canada is likely to say on July 30, according to the median of 21 estimates in a Bloomberg survey of economists.
Canadian corporate bonds are also lagging behind their global counterparts. Merrill Lynch’s Global Broad Market Corporate Index gained 0.7 percent this month.
Bonds lost some of their appeal after the Bank of Canada raised its benchmark interest rate on July 22 to 0.75 percent, the second increase in a row, and said its forecast includes “gradual” increases in borrowing costs. Government benchmark bond yields have climbed from one-year lows as their prices fell amid signs that the economic recovery won’t falter.
“Because the Canada yields have moved up, it’s caused some spread compression,” TD Securities’ Dong said. Even so, “there’s no loss of appetite for companies; look at that Air Canada deal,” he said.
The country’s largest airline sold $1.09 billion of high- yield debt to repay an existing loan and for general purposes. The notes brought total high-yield debt sales in Canada this year close to the record C$1.8 billion reached in 2007, said Robert Follis, head of corporate research at the Bank of Nova Scotia.
Air Canada issued $600 million of five-year notes that yielded 9.5 percent and C$300 million of debt of the same maturity that yielded 10.375 percent, Bloomberg data show. The company also sold $200 million of 5.5-year debt that pays 13 percent.
“Investors are still clamoring for yield,” Dong said. “If they can get over 10 percent, there’s buyers out there.”
To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net
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