Canadian corporates better bid, governments edge down after central bank leaves rates unchanged

By Rebecca Melvin

New York, May 31 - Canadian corporate bonds were slightly better bid on Tuesday particularly for longer-dated paper, but more or less unchanged amid no new issuance and generally tight supply, as Canada's central bank stood pat on rates but set the stage for further tightening down the road, market sources said.

Government bonds yields were up just slightly, primarily on the statement accompanying the Bank of Canada's rate policy statement, a source said.

Nevertheless, the session was quiet and essentially a continuation of Monday's when the tone was also muted due to holidays in the United States and United Kingdom that left markets in those countries closed in observance of Memorial Day and a bank holiday, respectively.

"There were no new issues, and it's been very quiet across all desks, given that the U.S. and London were out yesterday," a corporate bond strategist told Prospect News Tuesday.

But Canada's central bank, which stood pat on its 1% overnight interest rate benchmark, as expected, changed the wording of its accompanying rate policy statement, which pundits say lays the groundwork for rate tightening in the near to medium term, sources said.

Mark Chandler, fixed income and currency strategist with RBC Dominion Securities in Toronto, told Prospect News that he predicts there will be a further move in the direction of tightening with the monetary policy statement in July, leading to the first actual rate hike in September and further increases taking rates up to the 2% mark by this time next year.

Corporates see tire kickers

"There was marginally better buying," a Toronto-based market source said regarding more bids than offers seen during Tuesday's session.

In addition to June 1 coupon money and month-end flows, market participants were interested in rumors about potential supply of bank paper in the form of senior and more subordinated debt after earnings session is completed, the sources said.

Infrastructure, utility paper and the bigger financial names were the most active issues in the market on Tuesday.

Bond investors are eying the possibility of increased activity and an opportunity to trade out and pick up yield.

"There is potential activity and clients are looking at the long end especially with rumors of a P3 infrastructure deal being worked out" by later this year, a bond market source said.

"People are kicking the tires on the long end," he said.

Nevertheless there was no new issuance on Tuesday, and none talked about for later in the week as market players straggle back to their desks after the long holiday weekend, with not much to look forward to but a longish summer slowdown. Monday saw just a small C$50 million add on from Garda World Security Corp.

Government bonds edge slightly lower

The word on credit was that it was stable. But government bonds ticked slightly lower with Canadian two-year paper yielding 1.53%, which was up from 1.492% Monday, while the yield on the 10-year bond was yielding 3.061% up from 3.057%.

On Friday, Canada's 10-year bond yield rose to 3.06% from 3.05%.

Canada's central bank didn't actually say it is ready to hike rates, but instead said that lending costs would have to rise "eventually which everyone knows, though the timing's unclear at this point."

The decision Tuesday to continue to hold on rates followed a strong first-quarter expansion of 3.9% reported by Statistics Canada on Monday. Nevertheless, there are signs that point to slower growth as consumers cut back amid high debts and rising prices.

"The U.S. economy continues to grow at a modest pace, limited by the consolidation of household balance sheets," the Bank of Canada said in its statement regarding its rate decision.

In addition, growth in Europe is maintaining momentum.

"It sounds like by changed wording in the statement today, they are taking baby steps and laying ground for an eventual hike, but there is caution about what's going on," rate strategist Chandler said.

"It's not a dramatic step, just laying the groundwork and the official stance is pushed out to the fall," Chandler said.

There was no impact on spreads on Tuesday, and what's priced into the market is a 25 basis point increase, Chandler said, But he thinks that a 0.75% increase is in the offing beginning in September and running through mid year 2012.

"The bank wasn't explicit on tightening. It was a surprise for higher rates going forward, and reading between the lines, you could see a follow up in July in the monetary policy report, in which they could signal in an explicit fashion," Chandler said.

"What's priced in is one 25 basis points hike through the four remaining meetings, but I don't think that's correct. We don't think there is going to be an interruption in Canada's growth going forward," he said.

The assumption is that higher rates will come, and growth will be strong enough to take up the slack in the existing economy so that by the middle of 2012 there would be a movement of 150 basis points.

That contrasts to what Chandler sees developing in the United States, with the first rate hike not to be seen until next year.

What that will do for new issuance will be more of the same. "What we've seen is opportunistic issuance and trading close to the bottom of the range," Chandler said.

The government's rate stance is expected to be more forceful at the July meeting, and that may be a stronger catalyst for people to lock in at that time, he said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.