Canadian bond markets flat amid thin trading volume; bank paper widens 10 bps to 20 bps

By Cristal Cody

Prospect News, Aug. 23 - Trading in the Canadian bond markets on Tuesday stayed thin over the day without any new corporate or provincial deals, sources said.

While financial stocks and equities rose, bonds were flat in thin trading, according to sources.

"Pretty much unchanged over the last couple of days," a trader said. "The market tone the last two or three trading days is so poor that we need to see some continued improvement before accounts start buying. [There is] very little follow-through with buying in the corporate debt market in Canada anyways."

Bank of Montreal reported higher third-quarter earnings on Tuesday and financial stocks traded higher, but bank paper remained weaker in the secondary bond markets on the light trading, sources said.

U.S. equities were trading better because "there was a rumor that the U.S. was going to institute a no shorting of any stocks, that would have a big impact on the equities market," a source said.

All three five-year bank deposit notes from Royal Bank of Canada, Bank of Montreal and Toronto-Dominion Bank traded 10 basis points to 20 bps wider since they priced in July, a trader said.

Contingent capital potential

In other securities activity, no immediate effects are expected from the outcome of the Office of the Superintendent of Financial Institutions' contingent capital regulations, but there will be some impact, sources said on Tuesday.

"If the banks wanted to issue contingent capital, they will need approval from OSFI," one bond source said. "I think it will be a ways off before we see contingent capital supply. One thing the banks in Canada have is a lot of capital, and right now they're more concerned about liquidity than capital. We might see more bank debt note supply."

OSFI released the framework for the regulation last week and ruled on the Canadian Imperial Bank of Commerce's request to convert three outstanding series of perpetual preferred securities into Basel III securities.

On Jan. 13, the Basel Committee on Banking Supervision released the minimum requirements to ensure loss absorbency at the point of non-viability. The additional Basel III securities requirements are to ensure that all classes of capital instruments fully absorb losses at the point of non-viability before taxpayers are exposed to loss.

The advisory on non-viability contingent capital outlined OSFI's expectations in respect of non-common capital instruments to be issued by banks, bank holding companies, and federal trust and loan companies. The new requirements become effective for federal trust and loan companies on Jan. 1, 2013.

Any contingent capital deals "just depend on the bank's funding," another bond source said. "They basically just laid out the groundwork for banks to issue the stuff if it wants to. OSFI said they can do it now; previously they couldn't."

Government bonds fall

In other bond activity, government debt fell, sending yields up across the curve as stocks rose on Tuesday. Canada's 10-year note yield rose 4 bps to 2.38%. The 30-year bond yield ended 3 bps higher at 3.01%.

The main event of the week is the speech by U.S. Federal Reserve chairman Ben Bernanke at an annual banking conference in Jackson Hole, Wyo., on Friday. The stock markets have priced in the potential for an announcement of a third round of quantitative easing, but the bond markets aren't as sure, one source said.

"The equity markets are rallying in QE3 and I think they're going to be sadly mistaken," the source said. "The bond market is not discounting any likelihood for QE3. Yields are at record lows, the U.S. has got $99 billion of Treasury supply this week - the bond market will trade defensively ahead of that [Bernanke's speech]."

RBC paper widens

Royal Bank of Canada (Aa1/AA-/DBRS: AA) was among the financial names wider in secondary trading, a source said.

RBC priced an upsized C$1.25 billion of 3.03% five-year senior deposit notes at a spread of 77.9 bps over the Canadian government benchmark on July 21. The notes traded on Monday at 103.98 bps bid, the source said.

The investment bank is based in Toronto.

Bank of Montreal weaker

The five-year bank deposit notes of Bank of Montreal (Aa2/A+/DBRS: AA) traded about 20 bps wider on Tuesday, a trader said.

The bank's 2.96% bank deposit notes due Aug. 2, 2016 were seen at 105 bps bid. The C$1 billion issue priced at a spread of 84 bps over the Canadian bond curve on July 27.

The financial services company is based in Montreal and Toronto.

Toronto-Dominion Bank dips

Toronto-Dominion Bank (Aaa/AA-/DBRS: AA) also traded weaker in line with other financial paper, a trader said.

The bank's 2.948% deposit notes due Aug. 2, 2016 were quoted on Tuesday trading at 95 bps bid. The notes were sold in a C$1.75 billion offering on July 27 at a spread of 83 bps over the Canadian bond curve.

The bank and financial services company is based in Toronto.

Catalyst up, NewPage unchanged

A trader said that Catalyst Paper Co.'s 11% senior secured notes due 2016 were trading at 66 bid, 68 offered, which he called 2 points higher, while its 7 3/8% notes due 2014 were "quoted a little better" in a 30-32 range, an improvement of 2 points, "but there really were no trades in that one."

The Richmond, B.C.-based paper manufacturing company's sector peer, NewPage Corp., was "pretty much unchanged," with its 11 3/8% first-lien notes due 2014 at 81 bid, 82 offered.

He also saw the Miamisburg, Ohio-based coated-paper manufacturer's 10% second-lien notes due 2012 staying in the same 12-13 neighborhood seen on Monday, with "small volume" in both.

Paul Deckelman contributed to this report

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