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In July, corporate credit spreads remained relatively stable, reflecting resilient corporate performance amid market volatility and equity market selloffs. Canadian corporate issuance supply reached over $7B, closely matching the 10-year average for the month. Financial sector issuance accounted for nearly half of the month’s total issuance, driven by activity for both domestic and foreign issuers. Year-to-date issuance now totals over $86B, marking a 50% increase from the same period last year. On the provincial side, spreads were largely unchanged across the maturity spectrum.
Canadian Consumer Price Index headline inflation decreased marginally from 2.9% in May to 2.7% in June, indicating moderate stabilization within the 1%–3% Bank of Canada (BoC) target range. GDP growth for May exceeded expectations at 1.1% year-over-year, while growth for the month was modest at 0.2%. In mid-July, the central bank announced a reduction in the policy rate by another 25 basis points, thereby lowering its overnight rate to 4.50%. This move was the BoC’s second consecutive rate cut, driven primarily by inflation and economic growth outlook. The BoC has not provided detailed guidance; however, its dovish tone suggests that future rate cuts could be expected this year, in an attempt to get ahead of the 2025 mortgage renewal cycle.
Government of Canada (GoC) yields decreased substantially in July. In particular, the yield curve experienced notable bull steepening due to the BoC’s policy rate adjustment. In this context, the broad Canadian fixed income market (as represented by the FTSE Canada Universe Bond Index) recorded a positive absolute return of 2.37% over the month.
U.S./Canada relative value opportunities contributed to relative performance over the month as U.S. credit spreads tightened and the swap pickup compressed.
|
June 28 |
July 31 | Change |
|---|---|---|---|
U.S./CA swap difference |
56 bps |
54 bps |
-2 bps |
U.S./CA OAS difference |
-55 bps |
-58 bps |
-3 bps |
U.S./CA relative value |
1 bps |
-4 bps |
-5 bps |
Credit spreads by quality and maturity (bps)1
Corporate spreads slightly tightened, and provincial spreads remained unchanged this month.
Annuity proxy and related market spreads (%)2
We expect the annuity proxy to decrease from the latest CIA guidance of 1.50% to 1.40% (unrounded 1.38%) 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.
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.
This document may include statements which reflect expectations or forecasts of future events. Such forward-looking statements are speculative in nature and may be subject to risks, market events, uncertainties and assumptions and actual results which could differ significantly from the statements. As such, do not place undue reliance upon such forward-looking statements. All opinions and commentary are subject to change without notice and are provided in good faith without legal responsibility. 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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1Credit 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.
2Annuity 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.
3. Bloomberg and SLC Management internal credit research, 2023.
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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