Rick Brown at Stanton Asset Management sees no point in buying more Canadian government debt when he gets his semi-annual principal and coupon payments next week. For the first time, Stanton will pour all the proceeds into corporate bonds instead.
“I want to stay invested” in company debt, Brown said in a phone interview from his office in Montreal, where he helps oversee C$1 billion ($1 billion). “I don’t see a lot of value in the government curve, especially with where yields are at.”
Brown and other investors are fleeing Canadian government yields at almost record lows by redeploying cash into the corporate credit market. About C$14 billion in coupons and principal will be paid on Dec. 1, according to Royal Bank of Canada estimates.
A total of C$60 billion of such payments will flow to investors during the month, in line with past December figures, said Ian Pollick, a fixed-income strategist at Royal Bank’s RBC Capital Markets. December and June are the heaviest months for redemption and coupon payments for Canadian bonds.
The largest redemption is a 1.75 percent two-year bond, while a 4 percent, 30-year benchmark bond has a semi-annual coupon payment that day.
Companies are expected to take advantage of the spare cash in investors’ hands by issuing an additional C$5 billion of bonds in the next month, bringing total sales for 2012 to a six- year high of C$85 billion, according to Desjardins Securities’ Jean-Francois Godin.
“This usually attracts a lot of issuers back into the market,” Godin, senior market analyst in Montreal, said in a phone interview. “Companies want to tap that source of funds.”
Westcoast Energy Inc., Enbridge Pipelines Inc., Shaw Communications Inc. (SJR/B) and TransCanada Corp. (TRP) are among companies that may seek public financing in the next month and a half, according to RBC. Foreign companies are also expected to sell more Maple bonds. Sales of the bonds, named for the maple leaf on the nation’s flag, may double in 2012 from last year, to about C$6 billion, RBC estimates.
“We’re still looking at attractive new issues and we continue to see corporate bonds as good value over the longer term,” Patrick O’Toole, a Toronto-based money manager who helps oversee C$70 billion at Canadian Imperial Bank of Commerce’s CIBC Global Asset Management unit, said in an e-mail. “I would expect we’ll see enough corporate issuance in the next month or two that any December 1 money that’s sitting in government bonds won’t be there for long.”
Elsewhere in credit markets, Bombardier Recreational Products Inc., the maker of jet skis and outboard motors based in Valcourt, Québec, canceled plans to borrow $1.05 billion through loans, some of which would have been used to pay a dividend to owners Bain Capital LLC, Beaudier Group and Caisse de Dépôt et Placement du Québec.
The deal was withdrawn because of market conditions, said a person with direct knowledge of the plan who asked not to be identified because the information is private.
Tuscany International Drilling Inc. (TID), a Calgary-based company with drilling service operations in South America, said it may sell $200 million of bonds. The securities were assigned preliminary ratings in the speculative-grade category of B by Standard & Poor’s and B+ by Fitch Ratings.
The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government was unchanged at 141 basis points, or 1.41 percentage points, according to a Bank of America Merrill Lynch index. Yields increased to 2.97 percent from 2.95 percent on Nov. 20.
In the provincial bond market, relative yields were 1 basis point wider at 81 basis points. Yields climbed to 2.57 percent, from 2.54 percent on Nov. 20, according to Merrill Lynch data.
Canadian corporate bonds have returned 5.8 percent this year, compared with gains of 2.2 percent by the nation’s government bonds and 2.4 percent by provincials, the data show.
Governments bonds declined, with the yield on the 10-year benchmark note up one basis point to 1.77 percent at 9:35 a.m. in Toronto. The 2.75 percent security due in June 2022 slipped 10 cents to C$108.54.
The 10-year yield touched a record low 1.565 percent on July 23 as foreign investors sought refuge from Europe’s debt crisis. The World Economic Forum ranked the Canadian banking system as the world’s soundest for the fifth straight year on Sept. 5.
Still, Canada has underperformed global peers. The country’s government bonds with maturities greater than one year gained 2.3 percent this year, the fourth-worst performance among 26 nations tracked by Bloomberg/EFFAS indexes.
“You’d be very hard pressed to buy 10-year and 30-year bonds at these levels,” Pollick said. “Some cash that would historically be earmarked for the government sector will find its way into” corporate bonds.
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