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Canada’s Bond-Dumping Frenzy Escalates as Pensions Unload

Caisse de Depot et Placement du Quebec CEO Michael Sabia
Caisse de Depot et Placement du Quebec Chief Executive Officer Michael Sabia said at the Bloomberg Economic Summit yesterday, “We are not going to exit fixed income, but we are now significantly reducing the weight of fixed income in our portfolio for a variety of reasons having to do with where we see yields over the next number of years.” Photographer: Galit Rodan/Bloomberg

Canada’s biggest pension-fund manager will “significantly” cut its C$64 billion ($62.3 billion) allocation to bonds as the fixed-income market’s foothold among its most loyal base of investors grows less certain.

Caisse de Depot et Placement du Quebec Chief Executive Officer Michael Sabia said he’s scaling back fixed-income investments that account for 36 percent of its C$176 billion of assets under management, joining the Canadian units of HSBC Global Asset Management and Sun Life Global Investments Inc., which combined oversee about C$20 billion of assets. Canadian government bond yields have fallen to almost record lows, draining income for pension funds that have traditionally relied on fixed-income to fund decades-long pension liabilities.

“We are not going to exit fixed income, but we are now significantly reducing the weight of fixed income in our portfolio for a variety of reasons having to do with where we see yields over the next number of years,” Sabia said at the Bloomberg Economic Summit yesterday in Toronto.

Investors worldwide are struggling to meet minimum return targets after central banks cut benchmark rates more than 500 times since the financial crisis erupted in June 2007. The Caisse earned 3.9 percent from fixed income last year, compared with 13.6 percent for private equity. It plans to add C$10 billion to C$12 billion in what it calls less-liquid investments in the next two years.

‘Risky Market’

The average yield in the Bank of America Merrill Lynch Global Broad Market Index reached 1.51 percent May 2, its lowest since records began in 1996, while returns in the index at 0.8 percent this year are trailing equities. The MSCI World Index is up about 14 percent in 2013.

“The fixed-income market itself is a risky market with the level of yields as they are today,” Michael Wilson, chairman of Barclays Capital in Canada and a former Canadian finance minister, said yesterday at the summit. “Investors and particularly insurance funds have to be careful as so much of their funds are in yield-based products.”

Elsewhere in credit markets, the Bank of Canada auctioned C$1.4 billion of long bonds today. The 3.5 percent securities maturing in December 2045 fetched an average yield of 2.546 percent, with a coverage ratio -- the amount bid relative to the amount for sale -- of 2.47 times. The previous auction of 30-year debt, on March 13, fetched an average yield of 2.62 percent and a coverage ratio of 2.36 times.

Spreads, Yields

The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government was unchanged at 118 basis points, or 1.18 percentage points, yesterday from a day earlier, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields were little changed at 2.8 percent.

Spreads on provincial bonds were unchanged at 70 basis points, according to Bank of America’s Canadian Provincial & Municipal Index, while yields held steady at 2.54 percent.

Corporate debt has returned 1.9 percent this year, Bank of America Merrill Lynch index data show. Provincial securities have gained 0.8 percent, and federal-government bonds have added 0.2 percent.

The Bank of Canada on April 17 held its benchmark overnight rate at 1 percent, where it’s been since September 2010 and where 22 economists surveyed by Bloomberg forecast it will remain through the rest of the year.

‘Less Convinced’

Money managers in North America are giving about equal weighting to bonds and stocks this year, with fixed-income funds attracting $67.5 billion of net inflows through May 9 compared with $66.3 billion for equity funds, according to Cameron Brandt, director of research for Cambridge, Massachusetts-based EPFR Global, which tracks money flows. Last year, investors yanked $82 billion from North American stock funds, while adding $315 billion to bond funds, EPFR said.

“We are less and less convinced that markets per se are the best arbiters of value,” Sabia of the Caisse said. Benchmarking performance to market indexes “is not a good point of departure. They are more just a function of volatility.”

HSBC Global Asset Management’s Canadian unit is seeking higher returns from equities and paring bonds from its C$12.7 billion portfolio, James Huggan, HSBC Global’s Vancouver-based chief investment officer for Canada, said in an interview earlier this month. Over the last few quarters, he’s been shifting away from domestic sovereign debt.

Sabia, 59, plans to increase investments in assets such as real estate, infrastructure and private equity to reduce volatility in the Caisse’s returns. He’s also planning a C$20 billion fund that invests in the equity of large, global companies such as Nestle SA and Colgate-Palmolive Co.

“To me, there’s less risk sitting in that portfolio than there is sitting in a fixed-income portfolio,” Sabia said. “With yields where they are, people are searching for yield anywhere they can, and that’s had a ripple effect on asset pricing across a variety of different asset classes.”

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