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The mad scramble for cash amid the coronavirus panic is putting enormous strain on the Canadian corporate bond market, which the country’s largest companies rely on for a steady source of financing.

While high-quality credit typically serves as a safe haven in the midst of an economic shock, corporate bonds have plummeted alongside stocks over the past few bewildering weeks.

The iShares Canadian Corporate Bond Index ETF (XCB) – the largest of its kind – fell by a staggering 23 per cent in just 11 trading days, before a market-wide bounce on Tuesday clawed back a portion of the fund’s losses.

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With many investors liquidating all they can, there are few buyers for even the safest Canadian corporate debt, while the market is virtually inaccessible to new issuers. A CIBC report estimated Canadian bond market liquidity at just 10 per cent of its normal levels.

This liquidity squeeze risks spiralling into an outright credit crisis.

“There's a negative feedback loop,” said Hanif Mamdani, head of alternative investments at RBC Global Asset Management.

“Once you get a sufficient decline in price, investors back off, which makes companies even less able to refinance their debt, and then defaults go up and that makes people even more risk-averse.”

To help restore order, the Bank of Canada may follow the U.S. Federal Reserve’s lead and intervene in the corporate credit market for the first time in its history.

“To draw a line and support investment-grade debt, that's the kind of bold move that can inspire confidence. That will create some semblance of rationality,” Mr. Mamdani said.

Last week, the Bank of Canada opened that door, giving itself the authority to buy and sell corporate and municipal debt, “for purposes of addressing a situation of financial system stress that could have material macroeconomic consequences,” according to a regulatory notice from March 18.

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But with potential quantitative easing, as with rate cuts, the Bank of Canada has remained relatively cautious compared to other major central banks.

While the U.S. Federal Reserve has cut its policy rate to near zero and implemented unlimited quantitative easing to ward off a credit squeeze, the Canadian overnight lending rate sits at 0.75 per cent – the highest in the developed world, according to Benjamin Reitzes, a Bank of Montreal strategist.

The Bank of Canada has pulled a number of policy levers over the past two weeks to enhance liquidity in financial markets. On Tuesday, the Bank of Canada said it will begin buying portions of new money market securities issued by provinces. But the central bank has yet to indicate that it intends to use its authority to support the Canadian corporate credit market.

Some market observers argue that time is of the essence. “What exactly is the BoC waiting for?” Mr. Reitzes asked in a report. “Newsflash, the outlook has deteriorated massively!”

On Monday, the Fed aimed its bazooka at the U.S. corporate credit market, announcing a plan to purchase bonds directly from investment-grade issuers, as well as on the secondary market. In the two trading days since, the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), which has nearly US$30-billion in assets, has rallied by 9.6 per cent.

While central banks in Europe and Japan have been active in corporate debt markets for years, this kind of intervention is new to North America.

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During the global financial crisis and its aftermath, the U.S. Federal Reserve purchased nearly US$4-trillion worth of Treasuries as part of its quantitative easing programs, but it was never a buyer of corporate bonds.

Right now, the market for corporate debt is “basically broken,” Bank of America analysts said in a report. Even blue-chip companies are having trouble tapping the market. Billions are pouring out of fixed-income funds. Over the past few weeks, credit spreads on U.S. investment grade debt – the difference in yield between corporate and government bonds – quadrupled to their highest level since the global financial crisis, according to Morningstar.

It’s a similar backdrop for Canadian borrowers, Mr. Mamdani said. “This is the weak link right now.”

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