Capital Exodus Shows Refuge Appeal of Debt Fading: Canada Credit
2013-01-18 05:00:27.0 GMT
(For a Canada Credit news alert see: SALT CACREDIT)
By Ari Altstedter
Jan. 18 (Bloomberg) — Canada’s haven appeal is eroding, with more capital flowing out of the country to securities abroad than foreign investment coming in for the first time in five months, led by a decline in demand for government bonds.
Canadians’ investment abroad outstripped foreign inflows by
C$2.2 billion ($2.23 billion) in November, led by an 89 percent drop in bond purchases by non-residents, Statistics Canada said yesterday. The outflow brought the six-month moving average of net flows to the lowest level since December 2008, when global credit markets froze, plunging much of the world into recession and helping to spark Europe’s sovereign debt crisis.
Canada’s strong balance sheet and relatively healthy economic growth made investment in the country more attractive in the past two years amid concern the euro currency bloc would splinter and the risk that the U.S. would return to recession, helping to drive yields to record lows. Global central-bank demand prompted the International Monetary Fund in November to recommend classifying Canada’s dollar as a reserve currency.
“Global bond funds as well as sovereign investors were looking to find a different home for their money because of concern about Europe and to a lesser extent concern about the U.S.,” Greg Anderson, the North American head of Group of 10 currency strategy at Citigroup Inc., said by phone from New York. “As those concerns dissipate, then you might see a little slower pace of flows into Canadian bonds.”
Canada’s government bonds yielded 1.61 percent yesterday, up from the record low of 1.31 percent in May 2012, according Bank of America Merrill Lynch’s All-Maturity Canadian Government Index.
The benchmark 10-year bond is the most expensive in the Group of Seven nations, with yields 38 basis points, or 0.38 percentage point, below the local benchmark, according to Bloomberg calculations based on asset swaps. The 2.75 percent note maturing in June 2022 has held near the current levels since June.
“We’re in a risk-on environment, so you’re just not going to make a lot of money investing in Canadian bonds right now and therefore Canadian dollars,” Jack McIntyre, who manages $44.5 billion in assets for Brandywine Global Investment Management LLC, said by phone from Philadelphia. “You could even lose money investing in Canadian bonds right now, because if the world continues to heal, growth re-accelerates, the perception is there could be inflation pressures and that could cause Canadian bonds to come under pressure.”
McIntyre divested from Canadian bonds a year ago and is invested in the debt of European countries that have been at the heart of the debt crisis, such as Italy, Ireland and Portugal, as well as Mexican debt.
Elsewhere in credit markets, Anheuser-Busch InBev NV, the world’s biggest brewer, doubled a planned Maple bond in Canadian dollars to C$1.2 billion. The Leuven, Belgium-based company issued C$600 million of five-year securities to yield 2.478 percent and C$600 million of 10-year notes yielding 3.461 percent.
Bombardier Recreational Products Inc., the maker of jet skis and outboard motors that’s owned by Bain Capital LLC, is seeking a $1.05 billion term loan to fund a dividend and refinance debt, according to a person with knowledge of the transaction.
The extra yield investors demand to hold bonds of investment-grade Canadian companies rather than the federal government held steady yesterday from a day earlier at 129 basis points, according to Bank of America Merrill Lynch data. Yields rose to 2.98 percent, from 2.94 percent on Jan. 16, the data showed.
In the provincial bond market, the yield premium over federal-government debt was unchanged at 74 basis points, according to another Bank of America Merrill Lynch index. Yields increased to 2.65 percent, from 2.61 percent the previous day.
Corporate bonds have returned 0.1 percent this year, compared with losses of 0.5 percent by both provincial debt and Canada’s government bonds, according to Bank of America Merrill Lynch indexes.
The U.S. economy added to signs of recovery yesterday with reports showing the number of Americans filing first-time claims for unemployment insurance fell last week to the lowest level in five years and housing starts climbed in December to the highest since June 2008.
In China, exports rose 14.1 percent in December, data last week showed. That was almost three times what economists predicted, adding to optimism the world’s largest economies are picking up speed.
“Some of the other sovereign bonds may start looking more appealing,” said Mark Chandler, chief fixed-income strategist at Royal Bank of Canada in Toronto. “In the end, I think it is correct that Canada’s safe-haven status will stop being such a strong factor. It has been a strong factor both in keeping the Canadian dollar strong and in keeping our yields depressed.”
Foreign inflows will taper off as the year goes on and an improving outlook in the euro region will “redirect” fund flows into shunned European peripheral government-bond markets, Chandler said.
Foreigners bought C$5.62 billion of securities compared to Canadians’ C$7.8 billion purchases abroad, Statistics Canada said yesterday. Canadians purchased a record C$5.7 billion of U.S. bonds in November, mostly in short-term instruments.
Canadians also added C$1.6 billion of U.S. equities.
The Canadian dollar has gained 3 percent versus its U.S.
counterpart in the past 12 months as crude oil, the country’s biggest export, fell 5 percent. Since the beginning of December crude oil has risen 7 percent and reached a four-month high yesterday.
“We’re seeing the Canadians start to divest out of Canada,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA, said by phone from New York. “The Canadian dollar could weaken as a safe haven relative to the U.S. and particularly if Canadians continue in that direction, and it’s very old data, so they probably have.”
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–With assistance from Ilan Kolet in Ottawa. Editors: Dave Liedtka, Greg Storey
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