Fixed income tumbles in Q1: IIAC

Jack Rando, director of capital markets for the IIAC, says the public’s aversion to debt products has to do with worries that Canada’s economy is deteriorating. “We’re seeing some concern with the direction the Canadian economy will take and that’s impacting credit markets,” he explains. “If things get worse in the U.S., how severe an impact will that have on our economy?”

Besides concern over the economy, inflationary pressures, resource prices and widening credit spreads are also making people less comfortable with debt. “These things are having an impact on the credit market globally,” says Rando. “Until the credit spreads return to more normal levels, activity in the credit markets might be less than they were a year or two ago.”

All these concerns have really hurt one area in particular — Maple bonds. Once a shining beacon in the Canadian marketplace, people have turned their backs on this investment option in massive numbers. In Q1, four Maple offerings accounted for $500 million — that’s down 79.2% from the fourth quarter and a whopping 96.1% from this time last year.

Bond issuances are highly concentrated in the financials sector, so if the banks are having a hard time, which they are now, then the Maple market is more likely to suffer.

Related articles:

• Once-hot Maple bonds experience big declines • Debt issuance takes a big hit • Debt issuance increases thanks to Maple bonds

Maples are also issued by foreign institutions and, lately, more people have been avoiding unfamiliar names. “There’s more of a home bias,” says Rando. “Canadian investors prefer to invest in more recognizable names, as opposed to less-known foreign corporations.”

Rando thinks interest in Maples will pick up once the credit market sorts out its problems, especially because the government isn’t issuing as many bonds these days. In the first quarter, total government bond issuance fell 22.8% from Q4. Government of Canada bonds dropped by 1.8% to $7.2 billion, while provincial and municipal bond offerings fell 57.3% and 83.3%, respectively, in Q1.

“The government is relying less on the public markets for funding, because their coffers are in pretty good shape,” says Rando. “That means fewer quality Canadian bonds are being issued.”

That forces investors searching for yield to turn toward preferred shares or Maple bonds. “Sooner or later investors will have to look again towards alternative products,” Rando explains. “As the federal government reduces its debt issues, investors will have to look elsewhere to invest, and for a lot of investors, Maples might be the alternative.”

Corporate bonds were also hit hard, with spreads widening to 195 bps by the end of March. That’s almost a 50% increase from December 2007. Total corporate bond issuance fell to $18.1 billion, a drop of 10.8% from Q4.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(07/25/08)