Corporate Bond Returns Among World's Lowest as Rates Rise: Canada Credit

Canada’s corporate bond returns relative to stocks are the fourth lowest in the world this year after the Bank of Canada became the first Group of Seven nation to raise borrowing costs.

Canadian companies in a Merrill Lynch global index of corporate bonds had a total return of 8 percent this year through Sept. 7, compared with a 4.9 percent gain for the Standard & Poor’s/TSX Composite Index, for a relative outperformance of 3 percentage points. Among 20 developed markets tracked by the index, only Finnish, Swedish and Danish corporate bonds returned less versus their country’s equity benchmark.

Canada’s central bank this week raised its overnight lending rate for the third time this year, reversing a bond rally that had pushed corporate yields down to an 18-year low last month. A broad index of Canadian corporate bonds has declined 1 percent in September, after returning 7 percent in 2010’s first eight months.

“The popularity of bonds and bond funds is helping drive yields down, but our central bank is countering some of that by raising rates in the short end,” said Murray Leith, who helps manage C$6.5 billion ($6.3 billion) at Odlum Brown Ltd. in Vancouver.

Elsewhere in credit markets, the extra yield investors demand to own Canadian corporate bonds rather than federal debt held steady at 148 basis points yesterday, according to a Bank of America Merrill Lynch index. Spreads have been as wide as 154 basis points and as narrow as 114 basis points this year. Yields rose to 3.85 percent yesterday, from 3.80 percent the day before.

Ontario Sale

Companies have sold C$2.48 billion in bonds this month, compared with C$500 million in the same period in August, according to data compiled by Bloomberg.

Ontario, Canada’s most populous province, sold C$600 million in a reoffering of its 4.65 percent bonds due in June 2041, bringing the total outstanding to C$1.8 billion. The debt was priced to yield 85.5 basis points over government benchmarks.

Provincial bonds’ relative yields narrowed yesterday to 56 basis points, from 57 the day before. Spreads have been as wide as 71 basis points this year, and as narrow as 39.

Statistics Canada will probably report Canadian employers added a net 30,000 positions to payrolls in August, according to the median of 15 economists’ forecasts in a Bloomberg News survey. The report is due at 7 a.m. Ottawa time.

Canada’s corporate bond returns relative to equities have lagged behind most countries this year after the central bank raised rates, and as Canadian stocks rose.

Higher Rates

The Bank of Canada has raised its benchmark interest rate three times this year, to 1 percent, while the U.S. Federal Reserve’s main interest rate remains at 0.25 percent. Most economists in a Bloomberg survey don’t see the Fed increasing its target for the federal funds rate until the third quarter of next year.

Worldwide, corporate bonds have outperformed stocks by 9 percentage points this year as concerns about the global economic recovery drive yields lower. In the U.S., corporate bonds have outgained the S&P 500 by 11 percentage points after debt prices rose to a six-year high last month.

“Investors in the U.S. are looking for something safer than just a dividend yield attached to something that could, in theory, go to zero,” said Harvey Libby, manager of fixed-income trading at Raymond James Ltd. in Toronto. “Canadians are comfortable in their high-quality shares because we didn’t run into the same problems with the bailouts. It’s a totally different mindset.”

Canadian corporate bond gains in the Merrill Lynch global index have trailed the broader index this year, 8 percent to 8.5 percent as of Sept. 7. U.S. and U.K. debt had total returns of 10 percent.

Commodity Rally

While Canada’s corporate bonds have lagged behind, its benchmark stock index has gained 4.3 percent this year, including dividends, compared with a 0.8 percent loss on the MSCI World Index and a 0.4 percent gain on the S&P 500. Raw- materials companies, which make up 22 percent of Canadian stocks by market value, have jumped 13 percent this year thanks to a jump in gold prices and BHP Billiton Ltd.’s $40 billion unsolicited bid for Potash Corp. of Saskatchewan Inc.

“The U.S. system almost went off a cliff,” said Terry Shaunessy, president of Shaunessy Investment Counsel in Calgary, which manages about C$200 million. “Canadians did not undergo that kind of trauma. We did not have major institutions fail.”

To contact the reporters on this story: Matt Walcoff in Toronto at cfournier3@bloomberg.net

• Tweet
• More
  • Business Exchange
  • Buzz up!
  • Digg
• Print
• Email