The world’s appetite for Canadian government bonds this year is the heartiest ever as the country wins back its status as a haven for global debt investors.
Foreign investors plowed C$22.9 billion ($18.7 billion) into federal bonds during the first four months of 2015, the biggest inflow for the period in data going back to 1988. Last year, foreign investors sold C$9.6 billion more of the nation’s debt than they bought, the biggest net-outflow since 2003, as the currency and prices for crude oil, Canada’s largest export, plunged.
This year’s investment surge is a return to a role Canadian debt has played since the 2008 credit crisis as a haven for global capital. Whereas in 2010 when Canadian debt attracted record inflows as investors were fleeing slowing economies, they’re buying it this year because the world may grow too fast, leading to the higher inflation and central bank interest-rate increases that eat away at bondholders’ coupon payments.
“There’s still an appetite for fixed income,” said Andrew Kelvin, senior fixed-income strategist at Toronto-Dominion Bank, in a telephone interview. “There’re only so many safe havens.”
Foreign buyers have been rewarded this year. The nation’s government debt is alone among Group of Seven nations to make investors money as the U.S. central bank plans to raise interest rates this year and signs of inflation have appeared in Europe.
Canadian government bonds have returned 1.3 percent this year, compared with losses for government debt from all other G-7 nations, according to Bank of America Merrill Lynch data. Last year, Canada’s 7.5 percent returns lagged behind European peers, while beating Japan and the U.S.
Buyers may also take comfort with futures prices showing the Bank of Canada won’t increase interest rates until the middle of next year. Long-term inflation expectations as measured by the 10-year break-even rate, remain below the central bank’s 2 percent target.
“There’s a fair bit of comfort that the Bank of Canada will remain on hold for a much longer period than the Federal Reserve will,” TD’s Kelvin said.
Canada’s benchmark 10-year government bond gained Friday after reports showed that the country’s inflation rate advanced 0.9 percent in May from a year earlier, and retail sales unexpectedly declined in April.
The central bank’s interest-rate cut in January increased the value of existing Canadian bonds. And with a policy rate at 0.75 percent, coupon payments are generally higher than in the U.S., where the benchmark rate target is between zero and 0.25 percent, and Europe, where some rates are negative.
Add to that a top credit rating and the European Central Bank’s plan to hold down interest rates is to buy the debt from European governments itself and Canada’s C$900 billion of debt gets even more valuable, according to Jason Parker, head of fixed-income research at Bank of Montreal.
“A lot of it has to do with quantitative easing in Europe and a dearth of supply of available high quality bonds as they start to roll out their QE program,” he said by phone from Toronto. “Canada is one of the few remaining, highly rated governments out there, so that would create inherent demand.”
The decline in crude oil which clouded Canada’s prospects into the beginning of this year, has also reversed. The price per barrel has increased from a six-year low of $42.03 in March to $60.42 per barrel Thursday.
The bond inflows may act as a support for the currency. Because Canada buys more from the rest of the world than it sells, it needs a stable source of capital to balance out that difference, and bonds are a better source than shorter term investments according to Greg Moore, senior currency strategist at Royal Bank of Canada.
“You want longer-term-type capital funding the deficit, so bonds, equity, those types of flows because they’re considered more buy and hold types of investments,” he said by phone from Toronto.