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The month of June was marked by record issuance in the Canadian corporate primary market, with new issuances reaching a record of over $20B. This amount is nearly double the 10-year average for June and second only to corporate issuances in March 2020. A key highlight was a significant $7B bond deal, the largest issuance on record in size, number of tranches, order books and buyer count. Despite this substantial influx in new issuances, corporate spreads remained relatively stable and increased only modestly. On the provincial side of things, spreads were largely unchanged across the maturity spectrum.
Canadian headline CPI inflation increased marginally from 2.7% in April to 2.9% in May. GDP growth for the month of April was in line with expectations at 0.3% and year-over-year GDP growth increased to 1.1%. In early June, the Bank of Canada (BoC) announced a reduction in the policy rate by 25 basis points, thereby lowering its overnight rate to 4.75%. In doing so, the BoC became the first G7 central bank to cut rates after nearly a year of holding steady at 5%. The decision was driven by significant progress in controlling price pressures, with improvements in core inflation and overall economic outlook. The BoC did not specify its future plans. However, based on recent press conferences, further policy interest rate cuts are likely in 2024.
Government of Canada (GoC) yields decreased by approximately 10 to 20 basis points across various tenors in June. In particular, the yield curve experienced notable flattening 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 1.13% over the month.
U.S./Canada relative value became more attractive during the month as U.S. corporate spreads widened by a bigger margin than their Canadian counterparts.
|
May 31 |
June 28 | Change |
|---|---|---|---|
U.S./CA swap difference |
56 bps |
56 bps |
0 bps |
U.S./CA OAS difference |
-63 bps |
-55 bps |
8 bps |
U.S./CA relative value |
-7 bps |
-1 bps |
8 bps |
Credit spreads by quality and maturity (bps)1
Corporate spreads slightly widened, and provincial spreads remained unchanged this month.
Annuity proxy and related market spreads (%)2
We expect the annuity proxy to remain unchanged from the latest CIA guidance of 1.50% 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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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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