Inflows Drop as Debt Posts Biggest Gain Since ‘04: Canada Credit
August 23, 2011, 9:37 AM EDTBy Sean B. Pasternak
Aug. 23 (Bloomberg) -- Canadian government and corporate bonds have posted their biggest gains this year since 2004, prompting some investors to curb purchases with government debt yields at almost record lows.
A broad index of Canadian debt has returned 7.1 percent in 2011, the most since the 7.3 percent return for all of 2004, according to a Bank of America Merrill Lynch data. Net flows into fixed-income funds were C$686 million ($693 million) last month and C$608 million in June, according to data from Investor Economics, a Toronto-based research firm. The two months were the least since May 2010.
Bond purchases by Canadian and foreign investors are declining even as bonds rally, which may limit future gains, said Carlos Cardone, a managing director at Investor Economics. The weakening U.S. economy and Europe’s sovereign debt crisis may prompt investors to invest in high-interest bank accounts and other products, he said.
“With yields at the levels that they are, there might be a perception that there isn’t much of a future for bonds to generate positive returns,” Cardone said in a telephone interview.
Investor Economics, which provides research to financial- services companies in the wealth-management industry, began providing fund information this month to Canada’s Investment Funds Institute of Canada, an industry group.
August Rally
Canadian bonds have rallied further this month, with the broad market index posting a return of 2.6 percent. Yields on 10-year Canadian government bonds dropped to a record low 2.25 percent on Aug. 19, while 30-year yields touched 2.93 percent, also a record, on concern a sovereign debt crisis in Europe will weaken a global recovery. Yields on two-year and five-year bonds reached historic lows earlier this month.
Bank of Canada Governor Mark Carney told lawmakers on Aug. 19 that the Canadian economy stalled or shrank last quarter. He shared with Finance Minister Jim Flaherty the view that growth will rebound without further government stimulus.
“Recent Canadian data has been consistent with minimal to slightly negative growth in the second quarter,” Carney said in Ottawa, compared with his July 20 forecast that gross domestic product grew at a 1.5 percent annual pace from April through June. “The Bank continues to expect that growth will accelerate in the second half of the year, led by business investment and household expenditures.”
Balanced Budget
Flaherty said strains in the U.S. and Europe haven’t derailed his fiscal projections for this year or a plan to balance the budget by the fiscal year beginning April 2014.
The economic slowdown comes after foreigners sold a net C$3.46 billion of Canadian securities in June, according to Statistics Canada, the first reduction in bond holdings in 15 months. About C$11.8 billion of bonds matured in June, contributing to the outflows.
Elsewhere in credit markets, the province of Ontario sold C$350 million of 1.4 percent floating-rate notes that mature in September 2016. The sale brings the amount outstanding for the bonds to C$1.05 billion.
Canadian retail sales rose for a third month in June, climbing 0.7 percent to a seasonally adjusted C$37.8 billion, Statistics Canada said today in Ottawa. That matches the median estimate of 21 economists in a Bloomberg survey.
Investment Grade
The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government widened three basis points yesterday to 157 basis points, according to a Bank of America Merrill Lynch index. So- called spreads were as tight as 122 basis points in February. Yields rose to 3.26 percent from 3.24 percent on Aug. 19.
In the provincial bond market, relative yields were unchanged at 64 basis points yesterday. Yields were unchanged at 2.6 percent.
Investors also pulled $40.3 billion from U.S. mutual funds in the week ended Aug. 10, the biggest withdrawal since October 2008. Bond funds had withdrawals of $4.4 billion, according to the Washington-based Investment Company Institute.
Assets of Canadian bond funds have climbed 71 percent since the beginning of 2009 to C$88.6 billion, according to the Investment Funds Institute of Canada. That compares with a 38 percent increase for equity funds, to C$231.9 billion over that same period.
--With assistance from Frederic Tomesco in Montreal. Editors: David Scanlan, Paul Cox
To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net.
To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net
