Long Bonds Lure Standard Life With Biggest Rally Since 2009: Canada Credit
Standard Life Investments Ltd., which manages $225 billion of stocks and debt, is betting that the biggest rally in long-term Canadian corporate bonds in more than a year will continue.
Bonds due in 15 years or more have returned 4.5 percent in August, including interest payments, the most since gaining 5.95 percent in June 2009, according to Bank of America Merrill Lynch Index data. They have rallied 13.9 percent this year, double that of corporate debt of all maturities and exceeding the 0.91 percent gain in the Standard & Poor’s/TSX Composite Index of major Canadian stocks including reinvested dividends.
“As long as you are in a recovery, corporate balance sheets keep getting better and the yield pickup in corporate debt is attractive, especially at the long end,” Neil Matheson, senior vice president, investment strategy at Edinburgh-based Standard Life’s Canada unit, said in an interview.
Almost twice as many companies in Canada have been upgraded as downgraded by Standard & Poor’s this year as the outlook for corporate profits brightened. Concern the global economic recovery is faltering has depressed stock markets worldwide and drove corporate bond yields close to 20-year lows, encouraging more companies to refinance debt.
Long-term bonds issued by Canadian borrowers such as 407 International Inc. and TransCanada Corp. yield 1.92 percentage points more than government debt, compared with a spread of 1.06 percentage points for debentures due in 1 to 3 years, according to the Bank of America Merrill Lynch indexes.
‘Favorite Asset Class’
“Our favorite asset class, both globally and in Canada, has been corporate bonds, especially long-dated corporate bonds,” said Montreal-based Matheson, who leads a team that manages C$29 billion ($27.5 billion) in stocks, bonds, property and private equity for institutional and individual clients, and the company’s balance sheet.
Elsewhere in the nation’s credit markets, yield spreads on corporate bonds of all maturities ended yesterday at 1.45 percentage points, the widest gap since Aug. 10. Yields average 3.63 percent.
In the market for provincial bonds, the gap expanded 1 basis point, or 0.01 percentage point, to 0.59 percentage point. The securities have returned 2.31 percent this month, compared with 2.02 percent for government securities.
Canada will auction C$1.4 billion of inflation-linked bonds on Sept. 1, the Bank of Canada said yesterday on its website. The bonds, which carry a 4 percent coupon, will mature June 1, 2041, and add to C$12.7 billion of the issue already outstanding.
Growth Outlook
A day before the auction, Statistics Canada will give its first estimate of second-quarter economic growth. The Bank of Canada projected July 22 that growth would slow to a 3 percent annualized pace, from the 6.1 percent rate in the previous three-month period, which was the fastest in more than a decade. The estimate will be the last major piece of data before the central bank’s next interest-rate announcement on Sept. 8.
Matheson said he boosted his holdings of long-term corporate debt to about 10 percent of the fixed-income portfolio early last quarter. Standard Life seeks to minimize the risk associated with long-term corporate debt by choosing bonds of issuers less exposed to economic slumps such as infrastructure companies, he said. Many of these companies have benefited from government spending on highways, ports and bridges during the recession.
“With long-term debt, you really have to know they’re going to be around,” said Matheson. “We do like to get that duration and that credit pickup without a massive amount of underlying cyclical risk in the operating cash flow.”
Standard Life’s long-term corporate bond holdings include natural gas pipeline operator TransCanada, British Columbia Ferry Services Inc., the government-owned transport agency, Greater Toronto Airports Authority and 407 International, which operates a toll road around Toronto.
“Those are positions we will hold for years and years.” Matheson said.
To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net; Frederic Tomesco in Montreal at tomesco@bloomberg.net.
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