The Bank of Canada may be holding off on interest-rate hikes, but the country's largest financial institutions are signalling they expect the cost of borrowing to rise in the not-too-distant future by staging a series of massive bond sales in recent weeks.
Canada's central bank kept benchmark rates at historic lows last week, explaining that the business outlook remained uncertain and there is still slack in the economy. However, the news release from Bank of Canada Governor Stephen Poloz did note that market sentiment is shifting: "Following the election in the U.S., there has been a rapid back-up in global yields."
It's that move in U.S. markets that put the spurs to Canada's big banks. U.S. bond yields spiked after the election of Donald Trump, in large part on expectations that the incoming Republican administration will rekindle inflation through government spending. With credit markets moving, the country's largest financial institutions rushed to lock in debt at current rates, selling $6-billion in bonds in the past two weeks. Analysts expect corporate Canada to continue to tap the credit markets this week.
"As a rule of thumb, 80 per cent of any move in U.S. interest rates will be passed through to the Canadian corporate-bond market," said credit-market analyst Jean-François Godin at Desjardins Securities Inc. He said Canada's financial institutions have been the most active debt issuers since the U.S. election, and are expected to continue tapping credit markets, but utilities, industrial companies and the provinces are also cranking up bond sales.
The biggest deal seen in recent weeks was a $1-billion sale of five-year bonds from Bank of Nova Scotia that offers 1.9-per-cent interest. After announcing the sale, Scotiabank bumped it up to $2.25-billion in the face of strong investor demand. There was similar investor interest in a $1-billion, seven-year bond from HSBC Holdings that pays 3.146-per-cent interest; it ended up being twice as large as originally anticipated.
Bank of Montreal and Royal Bank of Canada also staged $1.25-billion bond financings last week, while mutual-fund company CI Financial Corp. raised $200-million selling five-year debt. Banks are taking advantage of a relatively small window for raising money that opens when they announce fourth-quarter results after their Oct. 31 fiscal year-end and effectively shuts over the Christmas holidays.
The demand for corporate debt comes from investors ranging from pension plans and fixed-income mutual funds to RRSP holders, all of whom are striving to get more income from their portfolios by stocking up on holdings of corporate paper, while lightening up on federal government debt.
While bond markets have been rocked by rising U.S. interest rates, the yield on government bonds is still thin gruel for most investors. A benchmark U.S. 10-year government bond now yields 2.46 per cent. While that's well above the 1.6-per-cent yield seen in September, ahead of the U.S. election, it's hardly a return that sets hearts racing for those living on the income from their savings.
Investors' appetite for higher-yielding securities is prompting large bond sales from traditional investment-grade issuers such as banks and utilities, and is also leading to successful high-yield bond sales from Canadian companies that are not ranked as investment grade by rating agencies – the junk-bond world.
Last week, Ritchie Bros. Auctioneers Inc. raised $500-million (U.S.) to fund a recent acquisition by selling bonds that pay 5.375-per-cent interest. And Source Energy Services, a Calgary-based company that supplies the fracking crowd, sold $150-million of debt that pays 10.5-per-cent interest in a private placement. These high-yield offerings are not for the faint of heart, but are finding buyers in a market that remains hungry for income.