April 2023: Canadian Monthly Corporate Bond Watch

PM spotlight

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

Corporate credit spreads moved tighter in April as fears of a contagion of the banking crisis to Canada receded. In this context, the Financial sector, and more particularly banks, outperformed from a spreads perspective. The lack of corporate new issuance year to date, which remains well below historical average and roughly 50% lower than it was last year, is contributing to spreads holding relatively firm as investors are hungry for new deals. On the provincial side of things, spreads were flat for the month.

After increasing during the first half of the month, Government of Canada (GoC) bond yields trended downward and ended the month slightly lower. The month-over-month small absolute changes in yields hide the intra-month volatility in yields, which remains elevated as liquidity is challenged. The Canadian fixed income market (as measured by the FTSE Canada Universe Bond Index) posted an absolute return of 0.98% during the month, bringing the year-to-date performance to 4.23%.

Canada’s annual inflation rate, as measured by the Consumer Price Index, decreased from 5.2% to 4.3% in March, largely driven by the base-year effect and in line with market expectations. As widely anticipated, the Bank of Canada kept the target for the overnight rate unchanged at 4.5% at its April meeting, but retained a hawkish tone and questioned the market expectations for a rate cut prior to the end of 2023, which they don’t envision as their most likely scenario.

U.S./Canada relative value opportunities became more attractive during the month as long Canadian corporate spreads tightened whereas their US counterparts were flat.


Mar. 31

Apr. 28


U.S./CA swap difference

46 bps

44 bps

-2 bps

U.S./CA OAS difference

-42 bps

-34 bps

8 bps

U.S./CA relative value

4 bps

10 bps

6 bps

Credit spreads by quality and maturity (bps)

Corporate spreads tightened across the maturity spectrum whereas provincial spreads were flat this month. 

Annuity proxy and related market spreads (%)

We expect the annuity proxy to remain unchanged from the latest CIA guidance of 1.60% (our estimate of the unrounded annuity proxy is 1.55%) 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. 

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.

SLC Management is the brand name for the institutional asset management business of Sun Life Financial Inc. (“Sun Life”) under which Sun Life Capital Management (Canada) Inc. operates in Canada. More information are available at https://www.slcmanagement.com

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.

No part of this material may, without SLC Management’s prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

© SLC Management, 2023