Foreign investors went on an unprecedented selling spree of Canadian bonds in June, offering further evidence of Canada’s fading international appeal.
A record $19-billion decline in foreign-held bonds, more than double the previous high set a decade ago, slashed what has become a reliable source of investment driven by Canada’s stellar reputation for financial outperformance.
“Those days are over,” said Doug Porter, chief economist at BMO Nesbitt Burns. “I think that’s been one of the stories of 2013. There’s less enthusiasm for Canadian assets among foreign investors these days.”
The divestment primarily targeted debt issued by the federal government and the companies it controls, according to Statistics Canada’s monthly report on international securities transactions.
The losses were moderated by a $3.2-billion net investment by foreigners in Canadian stocks and another $400-million in money market funds. All told, Canadian securities held by foreign investors fell by $15.4-billion, the largest decline since October, 2007.
As Canada diverged from the United States in the post-financial-crisis years, foreign investors found favour in Canada’s relatively unscathed banking system and housing market, plus its strength in resources. Recent years saw a consistent net inflow of foreign funds into Canadian securities in excess of $100-billion annually. But of late, the global investing community has grown leery of Canadian real estate, slowing growth and vulnerability to softening commodity prices. Hedge funds lined up to bet against Canada – the trade dubbed the Great White Short.
Over the first half of this year, net spending on Canadian bonds by non-residents amount to $16-billion, “a fraction of the net inflow chalked up during the first half of each of the prior five years,” Warren Lovely, an economist at CIBC World Markets, said in a research note.
The retreat from Canadian fixed income can be partly attributed to several incidental factors.
Maturities of public-sector bonds tend to coincide in June, which was compounded by big interest payments. Meanwhile, the prospect of the U.S. Federal Reserve Board beginning to reduce monetary stimulus may have deterred bondholders from reinvesting those proceeds back into Canadian securities.
“June was absolutely knee-deep in [Fed] tapering concerns and there was a lot of bond selling globally,” Mr. Porter said.
Still, selling of the magnitude seen in June could hint at some looming weakness in Canadian markets, said Camilla Sutton, chief currency strategist at Bank of Nova Scotia.
“[Friday’s] data is the first real evidence we have that there is a decreased appetite for Canadian-based fixed income.”
The worst things predicted for the Canadian economy haven’t occurred – at least not yet. The housing market has not crashed and commodity prices have not collapsed. In fact, the resurgence of oil prices and the narrowing of the price gap between Canadian crude and other benchmarks have lifted the pall hanging over the oil patch.
But it’s hard to fight a turn in investor sentiment, Ms. Sutton said.
“There’s a psychology behind it. If people believe that everyone is buying Canadian-based assets, then they’ll also buy. It’s very much self-fulfilling. It’s the reverse when things are selling.”
If the July figures disappoint further, anti-Canada sentiment could gain momentum, she said. And not just outside Canada. The report also showed domestic investors buying up foreign assets at an increasing pace.
“After years and years of outperforming the U.S. market, the tables have turned,” Mr. Porter said. “Canadian investors are recognizing that and are beginning to look abroad again.”
The Canadian dollar would certainly feel the effect of any sustained deterioration in the demand for Canadian bonds. That relationship could also help explain some of the dramatic currency volatility seen from mid-June to early July, when the Canadian dollar dropped by four cents against its U.S. counterpart, Ms. Sutton said.
“You can certainly draw that correlation. We had been suspicious.”