Yields Fall to 18-Year Low in Savings Bonanza as Sales Soar: Canada Credit
Yields on Canadian corporate debt fell to the lowest in at least 18 years as concern that the global economic recovery is flailing roils financial markets.
The yield to maturity on a broad index of investment-grade corporate debt fell to 3.626 percent yesterday, the lowest since June 1992, when Bank of America Merrill Lynch data begins. Yields reached 6.18 percent in October 2008, the highest in more than six years, as the worldwide credit crunch took hold.
Two-decade low yields mean companies can borrow more cheaply, giving them scope to shore up balance sheets by refinancing higher-cost debt and improve earnings. A company raising C$100 million ($94.5 million) would save about C$2.55 million in interest costs a year if it borrowed money now, compared with going to market in October 2008.
“Given a stagnating global economic recovery, underlying yields look likely to stay low for a while,” Altaf Nanji, senior credit analyst in Toronto at Royal Bank of Canada’s RBC Capital Markets, wrote in an e-mail. “It is very supportive for new supply. Investors should see issuers tapping the market.”
Elsewhere in credit markets, Canadian Imperial Bank of Commerce, the nation’s fifth-largest lender, sold C$250 million in floating rate notes maturing in February 2012. The notes paid 30 basis points above the monthly Canadian Dealer Offered Rate, or CDOR, which stood yesterday at about 0.921 percent.
Canadian corporate issuance in the third quarter was C$8.73 billion as of yesterday, compared with C$4.39 billion in the same seven-week period last year, according to Bloomberg data.
Tracking Governments
Corporate yields are plummeting because they’re tracking North American government bond benchmarks that are at “historic lows,” said Nanji. U.S. Treasuries rallied yesterday, driving two-year note yields to 0.4542 percent, a record low. An industry report showed sales of existing homes tumbled in July, bolstering concern the U.S. economy is faltering.
Canada’s two-year bond yielded 1.162 percent yesterday, the lowest since January, as the price of the 2 percent security due in September 2012 climbed 10 cents to C$101.60. Economic reports since Aug. 20 showed a surprise slowdown in core inflation in July and retail sales dropping for a third consecutive month in June. The 10-year bond yield fell to 2.79 percent yesterday, the lowest since April 2009.
“Underlying benchmarks are very low,” Joanna Zapior, Toronto-based head of corporate bond research at CIBC World Markets, wrote in an e-mail. “We came off the peaks in spreads but not back to the tightest levels. You have to look at the underlying as the key driver of low yields.”
Spreads
The extra yield investors demand to hold the debt of corporate rather than federal debt widened yesterday to 144 basis points, from 143 the day before. Spreads were as wide as 154 basis points in June and as tight as 114 in March, according to the Merrill Lynch indexes.
Canada’s corporate bond market, with about C$276 billion outstanding, is headed for a 1.89 percent gain this month, the most since January, compared with the 1.46 percent advance in Merrill’s index of Canadian government bonds. The Standard & Poor’s TSX Composite, the nation’s primary stock gauge, has lost investors 1.2 percent in August.
“Credit quality is getting slowly better for the broad Canadian-dollar corporate market, but there has been enough issuance so far this summer to keep spreads from getting too narrow,” Robert Follis, head of corporate bond research at Scotia Capital, wrote in an e-mail. “It’s not the spread tightening moving yields, it’s government bonds moving the broad yields on corporate bonds.”
‘High Bar’
Bank of Canada Deputy Governor John Murray said yesterday in the text of a speech he gave in Kingston, Ontario that the success of the central bank’s current inflation-target policy has set a “high bar” for any changes that may be considered.
The current policy of targeting a 2 percent annual rise in inflation has a “proven track record” of effectiveness “in both turbulent and tranquil times” that’s set a “relatively high bar against which any future changes must be judged,” Murray said.
Bank of Canada policy makers next meet on Sept. 8, after raising interest rates by a quarter percentage point to 0.75 percent on July 20, the second increase in two months.
The odds of the Bank of Canada raising its interest rate to 1 percent at its next meeting has fallen to 52 percent from as high as 76 percent earlier this month, according to a Credit Suisse Group AG calculation derived from overnight index swaps.
“The Bank of Canada cannot raise rates in this backdrop,” John Curran, a senior vice president at CanadianForex Ltd., an online foreign-exchange dealer, said by phone from Toronto. “Canada is under the gun.”
Futures Market
The yield on December 2010 bankers’ acceptances, the most- active contract, fell as much as six basis points to 1.03 percent, the lowest level since the contract began trading in December 2007. The yield, which indicates about where traders believe short-term rates will settle when the contract expires, reached 2.5 percent in June.
Canada’s two-year bonds yielded 74 basis points over the equivalent-maturity U.S. security, the least since April. The so-called yield advantage reached 115 basis points in May, the most since February 2008, on speculation the Bank of Canada would raise interest rates more aggressively than the Federal Reserve.
To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net
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