Vanguard Touts Canadian Debt Sunk by Worst Rout Since ’08

Vanguard Group Inc. and CIBC Global Asset Management are wagering the Canadian bond market will rebound in June after its worst rout since the height of the financial crisis.

An index of Canada’s broad market lost 1.5 percent in May through yesterday, the biggest monthly drop since September 2008, led by a selloff of government bonds. The U.S. broad market index lost 1.7 percent this month.

The swoon in bond markets on speculation the Federal Reserve will begin withdrawing extraordinary easing has tempered appetite for risk and put Canada’s AAA credentials in favor again. At the same time, record coupon and principal payments due in June will put a floor under Canadian bond prices as investors redeploy cash, helping to offset May’s losses. Canadian government 30-year bond yields traded 67 basis points lower than U.S. long-bond yields, the widest gap in more than a year.

John Braive, vice chairman at Canadian Imperial Bank of Commerce’s CIBC Global Asset Management, which oversees $50 billion of fixed income assets, said he’ll “most likely” put June redemption payments “back into Canada.”

“The market’s looking more attractive,” Braive said in a phone interview from Toronto yesterday. “You’ve already seen Canada outperform the U.S.; some of the money is already looking for a home and investing ahead of time. June redemptions support Canada outperformance.”

‘Defensive Purposes’

Jonathan Lemco, senior sovereign-debt analyst at Vanguard Group Inc., the world’s biggest mutual-fund manager overseeing $473 billion in assets, said he’s seeking buying opportunities in Canada.

“I am looking for safety,” Lemco said in a phone interview from Valley Forge, Pennsylvania. “We’re seeing some upheaval in the emerging-market bond markets right now -- as a consequence, I have a mild preference for Canadian provinces for defensive purposes.”

Lemco said he favors Saskatchewan and Manitoba as economies with steady growth and Ontario and Quebec because among Canadian provinces their bonds are easiest to trade.

Fed Chairman Ben Bernanke told Congress on May 22 the U.S. central bank could cut the pace of its monthly purchases of $85 billion in Treasury and mortgage debt if officials see indications of sustained improvement in economic growth.

Elsewhere in credit markets, Bank of Montreal sold C$1.5 billion ($1.46 billion) of seven-year deposit notes yielding 104 basis points more than Canadian government debt.

Valeant Acquisition

Valeant Pharmaceuticals International Inc., Canada’s largest drugmaker, will raise a $4.3 billion term loan and sell $3.23 billion in senior unsecured bonds, the company said in a regulatory filing. Proceeds will support the $8.7 billion acquisition of Bausch & Lomb Holdings Inc. and repay debt amassed by the eye-care company in its 2007 buyout.

The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government declined nine basis points in May to 115 basis points, or 1.15 percentage points, according to the Bank of America Merrill Lynch Canada Corporate Index. Yields rose to 2.86 percent, from 2.69 percent on April 30.

Spreads on provincial bonds narrowed nine basis points to 68 basis points, according to Bank of America’s Canadian Provincial & Municipal Index. Yields increased to 2.64 percent, from 2.44 at the end of April.

First-quarter net purchases of Canadian bonds by foreign investors totaled C$25 billion, the most since the third quarter of 2010.

Bond Redemptions

A total of C$67 billion of semi-annual redemptions from government and other bonds will flow to investors in June, the most ever, according to Royal Bank of Canada estimates.

The payments, which top last June’s C$63 billion, are likely to be reinvested in government bonds, Ian Pollick, a fixed-income strategist at RBC Capital Markets unit said May 7.

Canada is the sole Group-of-Seven country and one of only three in the Group of 10 with stable AAA ratings from Standard & Poor’s and Moody’s Investors Service.

The nation’s bond markets lagged behind global peers in the past year as the Bank of Canada’s bias to increase interest rates jarred with flagging growth and stifled gains. The broad market index has handed investors a 1.7 percent return since the end of May 2012, compared with global broad market returns of 2.8 percent.

“The market’s actually had a lot of bad news, and that’s why returns are negative and we’re starting to think it’s looking more attractive,” Braive said.