December 2021: Canadian monthly corporate bond watch

PM spotlight 

Randall Malcolm, MSc, CFA, Senior Managing Director & Portfolio Manager, Public Fixed Income

Little to no change to corporate and provincial spreads on a month-over-month basis despite the new Omicron variant, volatile commodity prices and persistent high inflation. As we enter the new year, our credit portfolios remain defensively positioned with a tilt towards higher quality.

Corporate bonds primary issuance was relatively strong when compared to a typical December in previous years, and was led by Rogers Communications first hybrid offering ($2 billion), which was 2.75x oversubscribed. Rogers Communications was the biggest spender ($3.3 billion) at the last government spectrum’s auction and is also in the process of purchasing rival Shaw Communications for $26 billion. With primary issuance in excess of $130 billion, calendar year 2021 set a new record for the Canadian corporate bond market.

The Government of Canada yield curve flattened during the month, driven by a decline in long-term yields. South of the border, long-term U.S. Treasury yields actually moved in the opposite direction over the same period. Yields increased as the Federal Reserve announced faster tapering of its asset purchase program on the back of higher and persistent inflation, further confirming its hawkish turn. 

U.S./Canada relative value is now slightly positive as the change in the swap difference had a more positive impact than the negative impact coming from the change in spreads levels.


Nov. 30

Dec. 31


US/CA swap difference

29 bps

47 bps

18 bps

US/CA OAS difference

-35 bps

-38 bps

-3 bps

US/CA relative value

-6 bps

 9 bps

 15 bps

Credit spreads by quality and maturity (bps)

Corporate and provincials spreads movements mostly muted during the month.

Annuity proxy and related market spreads (%)

We expect an increase in the annuity proxy (from 1.20% to 1.24%), based on the current levels of credit spreads and the current shape of the risk free curve. The actual annuity proxy will also reflect changes based on annuity market competition and changing longevity views, and will differ from this hypothetical estimate. An increase in the proxy may result in a decrease in pension liabilities. 


The content of this presentation is intended for institutional investors only. It is not for retail use or distribution to individual investors. All investments involve risk including the possible loss of capital. This presentation is for informational and educational purposes only. Past performance is not a guarantee of future results. 

Unless otherwise stated, all figures and estimates provided have been sourced from Bloomberg and SLC Management internal credit research. The information provided on issuance is based on internal experience internally. Unless otherwise noted, all references to “$” are in CAD. Any reference to a specific asset does not constitute a recommendation to buy, sell or hold or directly invest in it.  It should not be assumed that the recommendations made in the future will be profitable or will equal the results of the assets discussed in this document.

The information contained in this presentation is not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information contained in this presentation.

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Credit spreads by quality and maturity (graph)

Option adjusted spreads of the securities included in the FTSE Canada Universe Bond Index for different maturity buckets. Quality breakdown based on DBRS ratings. “FTSE®” is a trade mark of FTSE® International Limited and is used under license.

Annuity proxy and related market spreads: (graph)

The Annuity Proxy (Actual) references the appropriate spread to be added to the Government of Canada marketable bonds, average yield series, over 10 years (CANSIM V39062) as a proxy for the annuity purchase yield for a medium duration pension plan, as published in Canadian Institute of Actuaries (“CIA”)’s educational notes on “Assumptions for Hypothetical Wind-Up and Solvency Valuations” at various effective dates (“CIA’s educational notes”). Corporate and provincial spreads are the duration neutral (relative to the liabilities) option adjusted spreads based on a blend of mid and long term FTSE Canada corporate and provincial indices. The Annuity Proxy (Hypothetical) is based on an internal SLC Management auto regression model that seeks to explain the historical “Average of the Three Most Competitive Hypothetical Quotes” (“hypothetical quotes”) as published in the CIA’s educational notes, using FTSE Canada provincial and corporate spreads, and changes in the shape of the Government of Canada risk free yield curve as explanatory variables. According to the CIA’s educational notes, these hypothetical quotes are given weight by the CIA in determining the annuity proxy guidance, in addition to data collected on actual annuity purchases and bona fide quotations. For greater certainty, the actual and bona fide quotations used by the CIA are not publically available and have not been considered in our determination of the Annuity Proxy (Hypothetical).

Hypothetical performance data does not represent the performance of actual client portfolios. Trading and other costs have not been deducted from the performance data (e.g. commissions and custodial fees). Hypothetical results may differ significantly from actual performance, as there may be variations in the percentage of each security held, the timing of security purchases and sales, and the availability and/or price of a particular security over time as the portfolio does not reflect actual market conditions. Forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. Do not place undue reliance upon such forward-looking statements.

Forward-looking statements are speculative in nature and may be subject to risks, uncertainties and assumptions and actual results which could differ significantly from the statements. Do not place undue reliance upon such forward-looking statements.

US/CA relative value (table)

US/CA swap difference is the weighted-average pickup that results from the cross currency swap based on the key rate durations of the Bloomberg Barclays US Long Corporate Index. US/CA OAS difference is the difference between the option adjusted spread of the Bloomberg Barclays US Long Corporate Index and the Bloomberg Barclays Canadian Long Corporate Index.

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© SLC Management, 2021