Banks Sell Debt at a Record Pace Through the End of April: Canada Credit
Canadian banks sold debt at a record annual pace through the end of April as lenders reduced their reliance on government-backed mortgage financing as the economy improves.
Royal Bank of Canada and other Canadian lenders sold about C$12 billion ($11.44 billion) of debt in the first four months, up from C$5.4 billion in the same period last year, said Joanna Zapior, Toronto-based head of corporate bond research at CIBC World Markets.
“Bank issuance is the story this year in Canadian debt markets,” Zapior said yesterday in a phone interview. Of the $13.1 billion of debt sold this year by Canadian companies in U.S. dollars and maturing in more than one year, banks accounted for about $9 billion, she said. “The banks are back.”
Canada’s economy is expected to expand 3.7 percent this year, the Bank of Canada said April 22. At the same time, Canadian banks are selling more debt on the open market after tapping at least C$69 billion of liquidity from government agencies such as Canada Mortgage and Housing Corp. since October 2008, said Zapior.
The debt sales by the banks this year, mostly in deposit notes, or bonds backed by deposits, are on pace to surpass the record C$35 billion sold in 2008.
“The Canadian banks are returning toward normalcy in their funding patterns, mostly through the deposit-note market,” Robert Follis, Toronto-based head of corporate bond research at Bank of Nova Scotia’s Scotia Capital.
Follis said he expects the pace of deposit-note issuance to continue, depending on the rate of growth and acquisitions by the banks. The securities are backed by deposits.
National Bank of Canada on April 28 sold C$900 million of 4.03 percent deposit notes maturing in May 2015. The notes were priced to yield 94 basis points over comparable government debt.
Elsewhere in credit markets, traders increased bets the Bank of Canada will raise borrowing costs as early as June after a government report showed the nation’s economy gained 108,700 jobs in April, compared with a median forecast of 22 economists in a Bloomberg News survey that called for an increase of 25,000. Canada’s unemployment rate dropped to 8.1 percent from 8.2 percent.
A drop in the June 2010 bankers’ acceptances contract pushed the yield up 14 basis points to 0.89 percent today, erasing yesterday’s decrease of 9 basis points.
The yield on the so-called Bax contract surged to 0.94 percent on April 20, from 0.78 percent the day before, after the central bank dropped a pledge to keep its record low 0.25 percent target lending rate unchanged through June.
“A huge, huge Canadian employment number sent Bax contracts down,” said David Love, a trader of interest-rate derivatives in Montreal at brokerage Le Groupe Jitney Inc., referring to the price of the contract, which moves inversely to the yield and falls as expectations for borrowing costs increase. “They would be making new lows today if we hadn’t had the spike yesterday,” Love said.
The euro tumbled the most yesterday since the collapse of global credit markets in 2008 after European Central Bank President Jean-Claude Trichet failed to ease investor concern the Greek fiscal crisis will intensify. The Dow Jones Industrial Average fell almost 1,000 points, its biggest intraday loss since 1987, before paring the decline.
Canada will auction C$3 billion of three-year notes on May 12, according to a statement on the Bank of Canada’s Web site. The securities mature in September 2013. The previous auction of three-year bonds on March 24 drew an average yield of 2.189 percent with a bid-to-cover ratio of 2.25 times, according to data on the Bank of Canada’s Web site.
New debt issuance by Canadian banks in the first four months of the year wasn’t confined to deposit notes.
Capital Desjardins Inc., part of Federation des Caisses Desjardins du Quebec, on April 30 sold C$900 million of 5.187 percent subordinated notes maturing in 2020, according to Bloomberg data. On April 27, CIBC sold C$1.8 billion of subordinated debt, also maturing in 2020.
The extra yield investors demanded to own the bonds of Canadian financial institutions instead of government bonds ended yesterday at 133 basis points, the widest spread this year, according to a Bank of America Merrill Lynch index. The spread premium of financials over the broader Canadian corporate index fell to zero, the least since July.
“Financial spreads in general have been under quite a bit of pressure, largely on the back of what’s emanating out of Europe and the crisis in Greece,” said Tony Sevsek, managing director, debt capital markets at BMO Capital Markets in Toronto. “There’s been quite a bit of supply lately.”
Debt sold by Canadian financial institutions has returned 1.9 percent this year, according to a Bank of America Merrill Lynch Index, less than the 4.3 percent returned by Canadian industrials.