Ontario prices reopening of 10-year notes; provincials tighter; government bonds fall

By Rebecca Melvin

Prospect News, Sept. 14 - The Province of Ontario sold C$1.75 billion of its 3.15% 10-year notes in a reopening Friday, with the paper coming at 102.047 to yield 2.906% on Friday, an informed bond source said.

The bond tightened a basis point in aftermarket action, trading at plus 91 bps, and the provincial bond sector in general tightened 5 bps for the week, a provincial bond strategist said.

Canadian corporate bonds, which also have tightened, were subdued on Friday, while government bonds fell in the aftermath of the U.S. Federal Reserve's Federal Open Market Committee's surprisingly strong accommodative action plan announced Thursday.

Canadian government bonds traded down across the curve. Canada's 10-year note fell 88 cents, pushing its yield up 10 bps. The 30-year bond fell $1.58, causing its yield to jump 7 bps.

The huge selloff mirrored what happened in the U.S. Treasury markets, where yields increased 15 bps and 16 bps on the 10-year and 30-year bonds, respectively, on Friday.

"Today's action is all about adapting to unlimited QE," a fixed income strategist said.

Today is a one-day, huge sell-off in the U.S. caused by the Fed, which came out with something that was unexpected by most people," the strategist said.

Portfolio managers are selling bonds to buy stocks in an asset shift inspired with a risk on market, he said.

Bonds had run up prior to Thursday as a safe haven from risk, but the Fed's Thursday announcement was called a "game changer."

Treasuries didn't respond immediately to the news. Market players seemed to digest the implications for the new policy overnight and by Friday morning, opinions had solidified as to its implications.

"Not everyone who buys a bond cares about the inflation; it's been a safe haven, and now people are re-risking their portfolios," a strategist said.

"Very few people anticipated open ended QE, and it's a change of psychology to have unlimited QE," the strategist said.

Canadian corporate bonds were resilient. On Thursday spreads in corporate bond markets came in 2 to 3 bps.

Ontario sells outsized add-on

The Province of Ontario (Aa2/AA-/DBRS: AA) sold C$1.75 billion in a reopening of its 3.15% 10-year notes at 102.047 to yield 2.906% on Friday, an informed bond source said.

"It was fairly decent sized and did well," a provincial strategist said, adding that it was the only action in provincial market this past week.

The Ontario notes due June 2, 2022 priced at a spread of 92 bps over the Government of Canada benchmark.

RBC Capital Markets was the lead manager.

The province first sold the issue on Nov. 3, 2011 in a C$750 million offering at 99.589 to yield 3.196%, or a spread of 87 bps over the government benchmark.

The issue was last reopened on Aug. 21. The province sold C$750 million of the notes at 101.94 to yield 2.92%, or a spread of 95 bps over the Government of Canada benchmark.

"We've seen pretty decent strengthening, or spread compression," the provincial strategist said. Since midweek, spreads have compressed 5 bps, he said. For the week, they are 5 bps tighter.

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