As global bond yields plummet to record lows, many of Canada's largest and most sophisticated fixed-income investors have every intention to keep loading up on debt – despite its dismal returns.
Last week, the Canadian 10-year bond yield closed below 1 per cent for the first time ever. With inflation hovering at around 1.5 per cent, anyone holding this debt is likely to lose money in real terms.
Yet the Canadian pension funds and insurers that dominate the fixed-income market intend to keep buying both government and corporate bonds. Their justification: They are adapting to a new world order, one that has forced them to rethink traditional investing rules and benchmarks.
"Many institutions went from thinking of return on capital to return of capital," Sun Life chief investment officer Randy Brown said of the paradigm shift. "If I can just preserve my money … then that's something."
Historically, insurers and pension funds invested in fixed-income securities for their stable and predictable income streams. Bonds typically pay interest at regular intervals, and the principal amount on those with good credit ratings is all but guaranteed to get repaid at maturity. Such security helps these investors fund pension and life insurance liabilities decades down the road, while earning decent returns in the interim.
But with bond yields plunging, those returns are vanishing. Roughly $12-trillion (U.S.) worth of sovereign debt – that is, bonds issued by governments – now pays negative interest rates. In Switzerland, 50-year bond yields turned negative in July, meaning investors must pay the government a small sum to simply safeguard the funds for half a century.
The situation can be baffling. "I can't make sense of negative rates. That to me is completely idiotic. Why would you pay somebody else to hold your money?" said Jim Keohane, who runs the Healthcare of Ontario Pension Plan, which manages $64-billion (Canadian) in assets. "It's an irrational thought process." Full Story
MaRs to repay government ahead of schedule
There's a happy ending in sight for one of the many political headaches plaguing the Ontario government: the taxpayer-funded bailout of the MaRS Discovery District tower building project. The government is set to be repaid "the vast majority" of the $224-million it lent to the innovation-focused charity to complete construction this year – three years ahead of schedule, MaRS chairman Gord Nixon said.
"The province is going to get 100 per cent of its money back plus interest plus everything else," said Mr. Nixon, the former Royal Bank of Canada CEO. "The story [for MaRS] going forward will be very different … simply because the real estate will be a given rather than part of the story."
Several recent developments have improved the fate of MaRS' tower project. The 20-storey, 780,000-square-foot building is 90 per cent leased, attracting such tenants as Facebook, Airbnb and Autodesk, public-sector organizations including the Ontario Institute for Cancer Research and University of Toronto (now a part owner of the building), and several venture capitalists. Startups on-site include League, the latest from Kobo co-founder Mike Serbinis.
"There is a complete energy here that's changed," said financier Daniel Klass, who moved his Klass Capital into MaRS seven months ago. Canadian Imperial Bank of Commerce, Moneris and Manulife have also put money and employees into MaRS.
When the building is fully occupied next year, it will generate more than $15-million in annualized net operating income, informed sources told The Globe and Mail. This has increased the tower's appeal to private lenders. Real estate advisory firm Altus Group recently assessed the building's value at $513-million, well above the almost $400-million the Ontario government committed to complete it, sources said. It doesn't hurt that the tower is located in a corridor with a 1.4-per-cent vacancy rate and where average Class A office rental rates have increased 20 per cent since 2011, according to CBRE Canada.
With assessment in hand, MaRS and adviser Murray & Co. are working to refinance the property by selling close to $300-million in 20-year mortgage bonds, using the proceeds to repay most of the government loan. Term sheets were received last month from a handful of private insurance company lenders. Story
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Tim Kiladze