Canadian corporate bond issuance has begun to rebound after a lull of 10 months, with companies plotting expansion plans and central banks apparently close to the peak of their current cycle of interest rate hikes.
Companies including Enbridge, Bell, Bank of Nova Scotia and Brookfield Renewables raised a combined US$4-billion by issue of new corporate bonds in the first week of November, capping the busiest week for issuance in six months.
Some new bonds drew investors by offering juicy yields upwards of 5 per cent, attractive for high-grade, fixed-income products at a time of high volatility in the equity markets.
“After more than a decade of return-free risk in fixed income, current yield levels are very attractive,” said Brian D’Costa, President of Algonquin Capital, that specializes in fixed income investments. “We haven’t seen such yield levels in the last 15 years, and portfolio managers have cash to put to work,” D’Costa explained.
Bond dealers expect further issuance in coming weeks from Canadian utilities, pipeline companies and possibly real estate investment trusts (REITS). They expect investors to return to fixed income markets that this year had seen the biggest outflows in two decades as interest rates soared.
“The corporate bond market is opening again, this comes at a time when see the Federal Reserve and Bank of Canada are done with their round of interest hikes,” said Thomas Holloway of Pacifica Partners. “So companies are trying to get things done quietly.”
The Canada trend is in line with global resurgence in the bond market as investors expect a peak in inflation should prompt a pause in rate hikes from central banks. Corporate bond issuance in Canada fell 44 per cent in the first nine months of the year to US$34.0-billion, according to data from Refinitiv.
Last month, the Bank of Canada flagged slower pace of interest rate hikes after surprising the markets with a 50-basis-point increase in its key rate at its meeting.
Fund managers expect non-financial companies to lead the way as companies look to raise funds to either refinance debt or build cash in the balance sheet for capital expansion. This year in Canada, most corporate bond issuances have been from banks, and many portfolio managers have reached their limits on the financial sector.
Bell offered its 10-year bond at a coupon of 5.85 per cent, while Bank of Nova Scotia sold five year bonds worth US$1.5-billion with a coupon rate of 5.5 per cent.
Companies anticipating further rate hikes from the Bank of Canada could prefer to issue fixed rate bonds instead of opting for a floating rate commercial loan, analysts said.
After a lull of first 10 months, the S&P Canada Investment Grade Corporate Bond Index has risen by 0.61 per cent in the last one month, though year to date it is down 10 per cent.
A Bank of America Global Research published last week noted that investors have bought bonds worth $2-billion in first week of November, the most in the last four months.
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