There's a new normal in Canadian credit markets, as last week's peek into the abyss and Monday's European bailout prompt investors to rethink pricing on provincial and corporate bonds.
Interest rates on new domestic issues are expected to rise in the short term - a win for income-hungry investors - after a week that reinforced the risks that exist in credit markets.
Last week saw provincial and corporate bond issues all but dry up, where normally each sector sees at least a $1-billion of financing,
"With the European crisis unfolding and reaching its apex last week, provincial primary market activity ground to a halt," said a report on the sector on Monday from Desjardins Securities, noting this was the first time a week had gone by without a financing this year.
"We expect provincial issuance to resume, most likely domestically first, as stability gradually returns to credit markets worldwide," said Desjardins.
The domestic corporate market saw one small financing - a $175-million debt issue from mortgage company First National Financial Income Fund.
"A wild ride in credit markets last week had an effect on secondary flows with many accounts choosing to stand on the sidelines and watch the carnage unfold from there," said Desjardins. "At one point on Thursday afternoon, when equities were off by nearly 1,000 points, there was simply no bid in the market for anything."
"New issues will need to be priced with a greater concession going forward as the market has definitely been woken up from its recent period of sleepy complacency," predicted Desjardins. "Pricing of new issues will simply be based on where a deal can 'clear' the market."