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Pump jacks pump oil at an Encana well near Standard, Alberta.Todd Korol/The Globe and Mail

A global financial rout that wiped $7-trillion (U.S.) from equities markets worldwide and sent oil plunging to a 12-year low in January didn't spare Canada's bond market.

An index of Canadian investment grade, high-yield and government debt issued in U.S. dollars lost 0.8 per cent in January, its worst performance in the first month of the year since 2009, according to Merrill Lynch indexes.

Anxiety fuelled by China's economic slowdown has battered global markets since the start of the year, with commodities tumbling on lack of demand.

"It's just a reflection of the fundamental distress of lower commodity prices," Keith Bachman, head of U.S. high yield at Aberdeen Asset Management, which manages $100-billion in fixed-income globally, said by phone from Philadelphia. "China was kind of slowing down and now seems to be leading risk assets into a spiral."

The slump in commodity prices has led to bearish investor sentiment on Canada's lower-rated energy producers over the past year. The bonds of Canadian oil and natural gas companies are the worst performers among Group of Seven developed countries, with debt of investment-grade producers – including Encana Corp. and Canadian Natural Resources Ltd. – trading like junk.

Potential downgrades

Moody's Investors Service and Standard & Poor's have warned of a new round of potential credit cuts, after the raters between them handed out more than 50 downgrades to Canadian oil and gas producers last year.

Jason Parker, head of fixed-income research at Bank of Montreal, said there needs to be more stability in oil and the currency before international investors will begin buying Canadian debt again, particularly in Canadian-dollar denominated debt.

"Even though we might be experiencing economic pressures, I don't think anybody has any concern overall with the Canadian economy," he said. "And then we also have a Triple-A sovereign rating."

To High Rock Capital Management's Paul Tepsich, issuers that have seen their bond prices knocked down to 50, 60 or even 70 cents on the dollar may present a buying opportunity for investors willing to do their homework to find the good companies.

Buying opportunities

"Those are equity-like returns that we haven't seen since 2008 – and that was a very profitable period of time," Mr. Tepsich, a managing partner at High Rock Capital Management who manages $150-million (Canadian), said by phone. Canadian bonds rallied 15 per cent in 2009.

Oil producers with a decent production-hedge program in place, the ability to cut capital expenditure, cash flow to pay down debt, and flexibility with their banks are ones where investors should be putting their money into the bonds, Mr. Tepsich said.

While the price of oil has partially recovered from its low, and the Canadian dollar has pared some of its weakness against its U.S. counterpart, risks still persist, Mr. Tepsich said.

"We like 30-year investment-grade bonds," he said, citing their correlation to 30-year government of Canada bonds. "The world is in a deflationary environment, and you can see it in commodity prices, you can see it in long-dated government bonds, which have rallied enormously."

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