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Corporate credit spreads continued to tighten in October, almost uniformly across the credit curve. The real estate and securitization sectors experienced the most significant tightening, with new REITs deals performing strongly and high-quality securitized assets remaining a preferred option in this volatile market environment. On the new issuance front, October 2024 set a record as the busiest October on record, with $15 billion in new issues. This brings the year-to-date total to $124 billion – a 44% increase compared to the same period last year.
Canadian headline inflation continued its downward trend, with the Consumer Price Index dropping from 2.0% in August to 1.6% in September, below the market expectation of 1.8%. In response to declining inflation and a weakening economy, and for the first time since the COVID-19 pandemic, the Bank of Canada opted for a 50-basis point (bp) cut at its latest meeting. While initially considering a 25-bp reduction, the central bank ultimately opted for a more aggressive approach, in line with the U.S. Federal Reserve’s 50-bp rate cut in September.
Despite the 50-bp rate cut, Canadian bond yields rose in October, accompanied by a steepening yield curve. The yield on the 2-year Government of Canada bond increased by 16 bps, while the 10-year Government of Canada bond yield rose by 27 bps. Against this backdrop, the broad Canadian fixed income market, as represented by the FTSE Canada Universe Bond Index, experienced a negative absolute return of -1.01% for the month.
U.S./Canada relative value opportunities detracted from relative performance over the month, primarily due to an increase in swap pickup and a more significant compression of Canadian spreads compared to their U.S. counterparts.
|
September 30 |
October 31 | Change |
|---|---|---|---|
U.S./CA swap difference |
48 bps |
51 bps |
3 bps |
U.S./CA OAS difference |
-63 bps |
-59 bps |
4 bp |
U.S./CA relative value |
-15 bps |
-8 bps |
7 bps |
Credit spreads by quality and maturity (bps)1
Credit spreads continued to tighten, with both corporate and provincial bonds experiencing further contraction.
Annuity proxy and related market spreads (%)2
We expect the annuity proxy to decrease from the latest CIA guidance of 1.60% to 1.40% (unrounded 1.37%) 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, asset availability and changing longevity views, and will differ from this hypothetical estimate.
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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. 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.
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1. 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 trademark of FTSE® International Limited and is used under license.
2. Annuity proxy and related duration equivalent yields: (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”). Duration equivalent corporate and provincial yields are the duration neutral (relative to the liabilities) yields 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 do 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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