Even with the country's economy struggling to rebound from recession, the Canadian government is still the safest bet in the developed world.
Canada's government bonds have posted the biggest return among nine developed countries this year, according to the Bank of America Merrill Lynch world government bond index, as its central bank twice cut rates to help an economy succumbing to slowing global growth.
The slowdown at home has put the country's top-rated government debt in something of a sweet spot. The central bank's rate cuts, and expectations for a third, bolster the value of existing bonds even as the country's dimming economic outlook remains brighter than that of much of the developed world, which is dealing with a downturn in China, turmoil in the Middle East and an existential crisis in the European Union.
"Canada's debt is a source of safety, a harbour, in a time of so much uncertainty in the broader sovereign-debt market," said Jonathan Lemco, a senior sovereign-debt analyst at Malvern, Penn.-based Vanguard Group Inc., which runs the world's biggest bond fund. "Canada's had a slowdown and unemployment's going up, but it's all relative."
Canadian government bonds returned 3.8 per cent to investors through Dec. 24, compared with an average weighted return of 1.1 per cent for the index. The $425.8-billion Canadian government-bond market outperformed other developed economies that saw their credit ratings cut this year, such as France and Japan, Mr. Lemco said.
"It's a byproduct of an economy that's obviously struggled and a bond market that has moved to reprice expectations on monetary policy," said Warren Lovely, a managing director and head of public-sector research and strategy at National Bank Financial in Toronto.
Odds that the Bank of Canada will cut the overnight lending rate from 0.5 per cent by May jumped to 35 per cent from 26.7 per cent after Statistics Canada said on Dec. 23 the Canadian economy stayed flat in October, missing the 0.2-per-cent growth median forecast in a Bloomberg survey.
Bank of Canada Governor Stephen Poloz has said he expects growth in other sectors to offset the slump in gross domestic product caused by the 29-per-cent year-to-date decline in the West Texas intermediate price of crude oil, Canada's biggest export until this year. Manufacturing, one of the industries expected to benefit from cheaper energy prices, fell 0.3 per cent in October.
"Initially, we thought interest rates were going to go up, but then that view changed and suddenly now the Bank of Canada was cutting rates, and economic growth wasn't going to be nearly as robust as we thought," said Scott Gives, who manages $4.5-billion as a portfolio manager for SEI Investments Co. in Toronto. "That's a really favourable view for Canadian bonds."
The country's government bonds have been considered a haven for global investors since the 2008 financial crisis. Canada didn't have to provide the multibillion-dollar bailouts seen in other countries during the crisis and its banks are considered among the soundest in the world. Foreigners bought $10.2-billion of government securities in October.
Even as economic weakness persists due to Canada's vulnerability to commodity prices, and as the Bank of Canada may cut interest rates again, Mr. Lemco sees continued investor confidence in Canada relative to its global peers.
"The Canadian debt market is in large part a reflection of the underlying Canadian economy," he said. "And although it has been weaker than in the past, as a commodity exporter, the Canadian economy is still performing somewhat better than those other credits."