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The extra yield that bondholders demand to own Canadian corporate borrowings rather than government obligations ballooned 0.12 percentage points in August to 1.52 percentage points.Getty Images/iStockphoto

Canadian corporate treasurers returning from summer vacation with plans to sell bonds had better be prepared to pay up.

The market turmoil that swept the globe last month also rattled Canadian debt, causing the biggest spike in company borrowing costs in three years and shaving $9-billion off investors' holdings.

Corporations looking to raise funds as issuance revives following the slowest August in a decade face higher borrowing costs even after Canada's central bank cut interest rates twice this year to spur a cooling economy.

"Every new issue this year has lost money," said Jason Parker, head of fixed-income research at Bank of Montreal in Toronto. "Investors will want concessions."

The extra yield that bondholders demand to own Canadian corporate borrowings rather than government obligations ballooned 0.12 percentage points in August to 1.52 percentage points, according to Bank of America Merrill Lynch data. It's the biggest monthly jump since May, 2012, and the fattest spread since September, 2012.

Corporate yields, the rates companies actually pay to borrow, are still near record lows. Yet, the widening yield gap over federal debt shows it's getting more costly to entice investors to take on the added risk of lending to a company rather than the government.

In the first half of the year, Canadian companies issued at the fastest clip in at least a decade, according to data compiled by Bloomberg. That pace is slowing, with 2015 sales probably set to total as much as $95-billion, down from 2013's record $106-billion, according to Bank of Montreal's Mr. Parker.

As global markets convulsed, companies sold $1.4-billion in six bond issues last month, the slowest August in at least a decade, Bloomberg data show.

Tumbling commodity prices are raising questions about the growth prospects for Canada's resource-focused economy and the creditworthiness of its companies. The economy shrank the past two quarters, government data showed Tuesday.

The country's corporate debt lost 1 per cent in August while federal government bonds fell 0.3 per cent, according to Bank of America Merrill Lynch data. Canadian corporate bonds have seen deeper monthly losses only once since June, 2013.

The market turmoil also compounded the difficulty of buying and selling corporate bonds in Canada, helping fuel the sell-off, according to Marc Goldfried, who oversees $11.5-billion as chief investment officer of Aegon Capital Management in Toronto.

Capital requirements in the United States and globally have led some financial institutions to pull back from their traditional role as the bond market's middlemen, making it harder and costlier for investors to buy and sell bonds in a crunch.

It's just a matter of time before the higher trading expense gets passed on to companies when they borrow, Mr. Goldfried said.

"Issuers, if they really want to get deals done, the message they should be getting from their dealers and investment bankers is it's going to require wider spreads," he said. "The problem is the market is still trying to find the new liquidity premium necessary in this new liquidity environment. Until it does, you're going to find pressure on spreads."

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Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 18/03/24 4:00pm EDT.

SymbolName% changeLast
BAC-N
Bank of America Corp
+1.69%36.01
BMO-N
Bank of Montreal
+0.07%93.92
BMO-T
Bank of Montreal
+0.05%127.17

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