Review of Debt New Issues and Trading Third Quarter 2004

Transcription

1 Review of Debt New Issues and Trading Third Debt Market Slows in Q3 This s Highlights Government of Canada gross bond issuance totaled $14.7 billion in 16 issues, up 7% in value from Q2 but down 9% from Q3. Trading in federal bonds totaled $1.3 trillion, down 9% on a yearly basis. Real return bond trading was $3.3 billion, down 31% in value from last quarter and down 9% from Q3. Provincial gross bond issuance totaled $6.9 billion in 44 new issues, down 21% in value from last quarter but up 18% compared to Q3. Trading of provincial bonds totaled $86. billion, down 8% from last quarter but up 34% over Q3. Municipal gross bond issuance was $.6 billion in 49 new issues, up 4% in value compared to last quarter but down 4% compared to Q3. Corporate debt issuance was $1.2 billion, down 18% in value from last quarter and down 27% over the same quarter a year ago. Corporate debt trading totaled $28.6 billion, up 1% from last quarter and down 1% compared to Q3. Trading in money market instruments totaled $1.1 trillion in the third quarter, down 34% from Q2 and down 1% from a year ago. T-bill trading increased 12%, while trading of Bankers Acceptances and Commercial paper was down 1% and 3% respectively compared to the same quarter a year ago. Investment Dealers Association of Canada November

2 Debt Market Slows in Q3 Overall activity in the Canadian fixed income market was lackluster in the third quarter total bond trading fell 11% and new financings were down 7% quarter-over-quarter. The relatively weaker quarter is not surprising given that the summer is typically a quiet period for the markets. Despite the relatively weaker third quarter, the bond market has posted respectable gains this year. For the first nine months, total bond trading rose 2% while new issuance was up 8% over the same period last year. On the trading front, all public sector debt Government, provincial and municipal registered quarterly declines. With three quarters down, trading in has shown mixed results in public debt. For the first nine months, trading in provincial bonds jumped 1%, whereas Government of Canadas rose a mere 1% and municipals fell 13% compared to the same period in. In the corporate bond market, trading was up 11% over Q2 but total trading for the first three quarters was down 13% compared to the same period a year ago. Meanwhile, the increased cash positions held this year was reflected in the boom in money market trading activity. Although trading was down in the quarter, total money market trading is up 16% for the year-to-date, driven by strong demand for Canada T-bills. On the financing front, total issuance fell from Q2 with the only quarterly increase coming from the Government of Canada and municipals at 7% and 4% respectively. While total issuance activity is up this year, provincial bond financing has been buoyant, up 63% for the first nine months over last year. In contrast, municipal bond financings have dropped % year-to-date, exacerbated by a strong base effect from. Meanwhile, corporate bond financings eased in the third quarter, but issuance remains at relatively lofty levels. It s no surprise that the primary focus in the Canadian bond market was on oil in the third quarter. With crude oil topping $ a barrel, the bond market took solace in the view that surging oil prices could dampen growth prospects and decrease the need for tighter credit conditions. The growing conviction around this scenario was positive for the market, and sparked a bond rally with 1-year government yields edging 28 bps lower in the quarter. In contrast, short rates veered in the opposite direction. Short rates headed up as the the Bank of Canada started its monetary tightening campaign with a 2 bps hike to the overnight rate at 2.2%. While bond yields drifted lower, underlying trends remain negative for the bond market. Interest rates are expected to head higher and yields should continue to remain vulnerable to positive economic news and a pullback in oil prices. Canada/US spreads widened in the quarter with the spread of short-rates up 8 bps to 8 bps. On a similar path, the spread on long bonds edged up 1 bps to 89 bps. Looking ahead, the BoC is likely to move at a less brisk pace than the Fed, thanks in part to the dampening effect from the strong Canadian dollar. Canadian and US Short and Long Yield Spreads Spread (bps) Canada-US 3-month T-bill Canada-US 1 Government Bond Yield Source: Bank of Canada, US Federal Reserve Review of Debt New Issues and Trading - Q3 2

3 Canadian Interest Rates The BoC kicked off its monetary tightening cycle this quarter with a 2 bp hike in the overnight target rate to 2.2%. Although more rate hikes are likely in the coming months, the benign inflation backdrop should keep upcoming BoC tightening at a cautious pace. Bond yields marched to a different beat from short rates this quarter. The 1-year government yields drifted lower by 28 bps and Corporates fell by 31 bp from the second quarter. A rising rate environment and more buoyant economy should pressure long-bond yields higher in the coming quarters. Historical Short-Term Interest Rates 1 12 Bond Yields (%) Spread (bps) Month T-bill 1-Month Corporate 1-Month Spread Source: Bank of Canada Note: 1-Month Corporate = Prime Corporate Paper Rate Historical Long-Term Interest Rates 12 2 Bond Yields (%) Spread (bps) Long Term Canadas Long Term Corporates Spread Source: Bank of Canada Notes: Long-Term Canadas = Government of Canada Marketable Bonds, average yield over 1 years Long Term Corporates = Average Weighted Yield (Scotia Capital Inc.) - All Corporates Long-Term, over 1 yrs Review of Debt New Issues and Trading - Q3 3

4 Government of Canada Bonds: Trading and Issuance Despite a sluggish quarter, activity in the Government of Canada bond market remained at relatively high levels. Total trading in Canada bonds dropped 12% over the second quarter and was down 9% over the same quarter last year. However, for the first nine months, the value of total Canada Bond trading edged up 1.4% over the same period in. The number of Government of Canada bond financings in the period was less than half of the prior quarter, but the total dollar value rose 7%. While financings were up in value, this increase reflected a $16 billion redemption in the period whereby the Government paid down $6 billion of outstanding debt. The reduced issuance is in line with the Government s - debt strategy plan to lower the fixed-rate share of debt from two-thirds to 6% by For the year-to-date, total issuance of Government of Canada bonds is up 2.2% over the same period last year. ly Comparison of Government of Canada Bond Trading over- Q3/3 $1, % 16% Q4/3 $1,62.8-7% 17% Q1/4 $1, % 1% Q2/4 $1,17.9-1% % Q3/4 $1, % -9% Note: Excludes repos ly Comparison of Government of Canada Bond Issuance over- of Issues over- Q3/3 $ % 14% 34 1% -13% Q4/3 $ % 23% 38 12% 27% Q1/4 $17.8 3% 22% 29-24% % Q2/4 $ % -% 33 14% 6% Q3/4 $ % -9% 16-2% -3% Note: Government of Canada Direct and Guaranteed Bonds, including Crown Corporations, total Gross New Issues Delivered, par value Total ly Canada Bond Gross Issuance and Trading 2 1 Gross New Issues Delivered ly Trading Gross Issuance Total Bond Trading Review of Debt New Issues and Trading - Q3 4

5 Government of Canada Real Return Bonds: Trading and Total Outstanding Trading in Canada Real Return bonds in the third quarter was down 31% from Q2 at $3.3 billion, the lowest level since Q3. Investors do not appear to be overly concerned with inflation -- trading for the first three quarters of Canada Real Return bonds is down 8% from the same period a year ago. Meanwhile, the value of total outstanding Government of Canada Real Return Bonds reached a record high at $18.3 billion in the third quarter, reflecting a relatively steady flow of new bonds into the market. ly Comparison of Government of Canada Real Return Bonds Trading over- Q3/3 $3.6-27% 12% Q4/3 $4.6 26% 7% Q1/4 $.2 13% -13% Q2/4 $4.8-7% -3% Q3/4 $3.3-31% -9% ly Comparison of Government of Canada Real Return Bonds Total Outstanding over- Q3/3 $ % 9.% Q4/3 $ % 8.8% Q1/4 $ % 8.6% Q2/4 $ % 8.4% Q3/4 $ % 8.3% Source: Bank of Canada: Bank of Canada Banking and Financial Statistics Total ly Canada Real Return Bond Gross Outstandings & Trading Gross New Issues Delivered ly Trading 2 1 Total Outstandings Total Bond Trading Review of Debt New Issues and Trading - Q3

6 Provincial Bonds: Trading and Issuance In the provincial bond market, total trading was down 8% from Q2, but up 34% from the same quarter a year ago. For the first 9 months, trading in provincial bonds is up 1% compared to the same period last year. New issuance of provincial bonds fell 21% in value and dropped % in terms of the number of issues compared to the second quarter. Despite a relatively subdued third quarter, the year-todate picture is more positive -- new issuance of provincial bonds is up an impressive 62% from the same period in. ly Comparison of Provincial Bond Trading over- Q3/3 $ % -18% Q4/3 $8. 32% 1% Q1/4 $14. 22% 12% Q2/4 $93. -1% % Q3/4 $86. -8% 34% Note: Excludes repos ly Comparison of Provincial Bond Issuance over- of Issues over- Q3/3 $.841-4% 19% 63 47% 43% Q4/3 $ % 114% 79 2% 147% Q1/4 $ % 13% 84 6% 27% Q2/4 $ % 4% 88 % 1% Q3/4 $ % 18% 44 -% -3% Note: Total Gross New Issues Delivered, including Crown Corporations, par value Total ly Provincial Bond Gross Issuance & Trading Gross New Issues Delivered ly Trading Gross Issuance Total Bond Trading Review of Debt New Issues and Trading - Q3 6

7 Municipal Bonds: Trading and Issuance The municipal bond market had another tough quarter. Total trading fell 17% from Q2, and is down 13% for the first nine months compared to last year. On the financing side, municipal bond issuance totaled $.6 billion in 49 new issues, up 4% in value over Q2. However, year-to-date, municipal bond issuance is down % over the same period in. The sharp decline in municipal bond financing this year was exacerbated by the strong base effect resulting from the $9 million school board trust issuance in. ly Comparison of Municipal Bond Trading over- Q3/3 $3.3-2% % Q4/3 $4. 36% 38% Q1/4 $3.1-32% 31% Q2/4 $2.9-6% -3% Q3/4 $2.4-17% -28% Note: Excludes repos ly Comparison of Municipal Bond Issuance over- over- of over- over- Issues Q3/3 $ % 1% 69 6% 3% Q4/3 $ % -8% % -4% Q1/4 $.741 -% 27% 6-41% 23% Q2/4 $ % -7% 46-29% -29% Q3/4 $.63 4% -4% 49 7% -29% Note: Total Gross New Issues Delivered, par value Total ly Municipal Bond Gross Issuance & Trading Gross New Issues Delivered ly Trading Gross Issuance Total Bond Trading Review of Debt New Issues and Trading - Q3 7

8 Corporate Bonds: Trading and Issuance Trading in the Canadian corporate bond market rose 1% over Q2 and down a mere 1% from a year ago. While still at relatively robust levels, corporate bond trading is down 13% for the first three quarters over the same period in. In the third quarter, corporate bond issuance stood at $1.2 billion -- the lowest level since Q2 -- down 18% from Q2 and down 7.4% for the first three quarters over the same period in. Given the rising rate backdrop, tighter credit conditions have crimped corporate financing demand this year relative to. ly Comparison of Corporate Bond Trading over- Q3/3 $ % 1% Q4/3 $34. 18% -11% Q1/4 $32. -6% -4% Q2/4 $2.9-19% -29% Q3/4 $28.6 1% -1% Note: Trading data excludes repos ly Comparison of Corporate Bond Issuance over- of Issues over- Q3/3 $ % 14% 11 % 161% Q4/3 $ % 38% 8-26% 18% Q1/4 $ % 23% 9 6% 43% Q2/4 $ % -8% 82-9% -29% Q3/4 $ % -27% 69-16% -4% Note: Issuance data: Total Gross New Issues Delivered, par value Total ly Corporate Bond Gross Issuance & Trading Gross New Issues Delivered ly Trading Gross Issuance Total Bond Trading Review of Debt New Issues and Trading - Q3 8

9 Sector Breakdown of Corporate Bond Issues Top Corporate Bond Issues for Q2 : 8 Over $3 Million % Total Issuer Sector Issuance Bank of Montreal Financial & Real Estate $6..9% Bank of Montreal Financial & Real Estate $6..9% CIBC Financial & Real Estate $. 4.9% Bank of Nova Scotia Financial & Real Estate $. 4.9% Broadway Credit Card Trust Other $. 4.9% Schooner Trust Other $ % Honda Canada Finance Inc. Financial & Real Estate $3. 2.9% Caterpillar Financial Services Financial & Real Estate $3. 2.9% Total $3, % Source: Investment Dealers Assoc CORPORATE BOND ISSUANCE (Q3/4) SECTOR BREAKDOWN 1 MANUFACTURING (HIGH TECH) % 2 MANUFACTURING (OTHER) % 3 SERVICES 3.9% 4 RESOURCES 3.2% UTILITIES.9% 6 FINANCIAL & REAL ESTATE 72.6% 7 OTHER 14.4% SOURCE: Investment Dealers Association CORPORATE BOND ISSUANCE (Q3/3) SECTOR BREAKDOWN 2 1 MANUFACTURING (HIGH TECH) % 2 MANUFACTURING (OTHER) 1.4% 3 SERVICES 3.% 4 RESOURCES 3.3% UTILITIES 4.2% 6 FINANCIAL & REAL ESTATE 76.8% 7 OTHER 1.6% SOURCE: Investment Dealers Association Review of Debt New Issues and Trading 9

10 As usual, the financial and real estate sector dominated the market, with $7.4 billion or 73% of the quarter s total corporate bond financings. However, the sector s total financing and number of issues in the quarter were at the lowest level since Q1. The Bank of Montreal was the single largest issuer this quarter, with a pair of $6 million issues. The number two spot was shared between the Bank of Nova Scotia, CIBC and Broadway Credit Card Trust with $ million in issuance each. ly Comparison of Corporate Bond Issuance by Sector Manufacturing High Tech Manufacturing Other Services Resources of Issues of Issues of Issues of Issues Q3/3 $4. 1 $2. 1 $46. 3 $ Q4/3 $3. 1 $ $1,83. 1 $ Q1/4 $. $8. 1 $1, $3. 4 Q2/4 $. $. 1 $1,6. 7 $43. 4 Q3/4 $. $. $4. 2 $323. Utilities Financial & Real Estate Other of Issues of Issues of Issues Q3/3 $83.9 $1, $1, Q4/3 $1, $1, $ Q1/4 $1,8. 4 $8, $2, Q2/4 $674. $8,94.9 $ Q3/4 $6. 6 $7, $1, Notes: 1. Highest sector issuance value bolded for each quarter 2. Services sector includes: High Tech Services and Other Services 3. Resources sector includes: Forestry, Mining and Oil & Gas Review of Debt New Issues and Trading - Q3 1

11 Medium Term Notes: Issuance MTN issuance dropped in the third quarter with government and corporate financings at the lowest level since Q2. The most notable decline came from the corporate sector, where MTN issuance plunged % from the robust pace of Q2. For the year-to-date, the corporate sector still reigns as the leading issuer of MTNs with $18 billion compared with $13 billion from the government sector. ly Comparison of Medium Term Note Issuance: Government over- of Issues over- Q3/3 $ % 48% 64 4% 63% Q4/3 $4.4 4% 236% 62-3% 94% Q1/4 $6.81 % 143% 61-2% 17% Q2/4 $3.77-4% 1% 6 7% 48% Q3/4 $ % -1% 3-4% -3% ly Comparison of Medium Term Note Issuance: Corporate over- of Issues over- Q3/3 $ % 86% -2% 244% Q4/3 $.7-2% 32% 19-6% % Q1/4 $6.9 9% -2% 31 63% -11% Q2/4 $ % 9% 2-19% -64% Q3/4 $ % -47% 23-8% -8% ly Issuance of Medium Term Notes 1 Gross New Issues Delivered Corporate Government Review of Debt New Issues and Trading - Q3 11

12 Strip Bonds: Trading Total strip bond trading fell 36% from the record second quarter, reflecting the return of Canada strips to pre-q2 levels. Despite the quarter s decline, overall strip bond trading is still at high levels, with provincials accounting for the majority of trading. For the first nine months of this year, total strip bond trading is up 8.1% over the same period in. ly Comparison of Canadian Strip Bond Trading Government of Canada Strip Bonds Provincial Strip Bonds Total Strip Bonds over- over- over- over- over- Q3/3 $ % -21% $13.3-2% -8% $ % -13% Q4/3 $ % 24% $ % 4% $ % 38% Q1/4 $ % 4% $ % 12% $ % 9% Q2/4 $ % 8% $ % 9% $ % 1% Q3/4 $ % 11% $ % -6% $ % 4% Note: Trading data excludes repos, Components will not add to total as Corporate Strips are not reported ly Strip Bond Trading 2 ly Trading 1 1 Government of Canada Strip Bond Trading Provincial Strip Bond Trading Review of Debt New Issues and Trading - Q3 12

13 Money Market: Trading The total value of trading in all money market instruments in Q3 stood at $1.1 trillion, down 34% from the previous quarter. Despite the quarter s slowdown, the popularity of money market instruments remained strong -- total trading for the first nine months this year is up 16% over the same period a year ago. Trading in Government of Canada T-bills remained at healthy levels -- up 3% over Q2 and 12% over the same period a year ago. The appeal of holding cash this year is reflected in the 17% year-to-date increase in T-bill trading over the same period in. Corporate Paper trading was up 2% quarter-over-quarter, but down 3% year-over-year. For the first three quarters, trading in Corporate Paper is down % over the same period last year. Among the corporate paper market, trading in asset backed securities continued to pick up steam this year. In contrast, trading in BA s continued to wane with trading flat in the quarter and down 1% yearover-year. ly Comparison of Canadian Money Market Trading Government of Canada T-Bills over- Bankers' Acceptances (BA s) over- Corporate and Finance Company (Commercial) Paper over- Q3/3 $31.2 8% % $ % -1% $49.9-2% -6% Q4/3 $ % 18% $33.3 1% -3% $21. % -% Q1/4 $ % 23% $ % -7% $ % -% Q2/4 $33.1-3% 17% $ % -19% $ % -7% Q3/4 $ % 12% $246.7 % -1% $ % -3% Note: Trading data excludes repos BA's & Commercial Paper Trading Money Market Trading (ly Totals) T-bills Trading Commercial Paper Bankers' Acceptance Government of Canada T-Bills Review of Debt New Issues and Trading - Q3 13

14 Summary of Bond Trading and Issuance ($ billions except where indicated otherwise) Q3 Q2 Q3 4/Q2 4 % change Q3 Q3 4/Q3 3 % change YTD YTD % change Government of Canada Bonds Trading $1,31.8 $1, % $1, % $3,389.7 $3, % 4,44.7 3,79. 3,784.3 Issuance $14.7 $ % $ % $4.4 $ % Provincial Bonds Trading $86. $ % $ % $284. $ % Issuance $6.9 $ % $.8 18.% $28.3 $ % Municipal Bonds Trading $2.4 $ % $ % $8.4 $ % Issuance $.6 $.6 3.% $ % $2. $4. -.% Corporate Bonds Trading $28.6 $2.9 1.% $ % $86. $ % Issuance $1.2 $ % $ % $37.3 $ % Total Bonds Trading $1,149.3 $1, % $1, % $3,768.6 $3, % 4,883. 4, ,21. Issuance $32.4 $ % $ % $113. $1.2 7.% Note: Trading data excludes repos

15 CALGARY Suite 23 3 Fourth Ave. S.W. Calgary, Alberta T2P J1 Tel.: (43) Fax: (43) HALIFAX TD Centre, Suite Barrington St. Halifax, Nova Scotia B3J 3K9 Tel.: (92) Fax: (92) MONTRÉAL Bureau Place Ville Marie Montréal, Québec H3B 4R4 Tel.: (14) Fax: (14) TORONTO Suite King St. W. Toronto, Ontario MH 3T9 Tel.: (416) Fax: (416) Jon Cockerline Director, Capital Markets jcockerline@ida.ca Sherry Hum Research Analyst, Capital Markets shum@ida.ca VANCOUVER Suite 132 P.O. Box West Georgia St. Vancouver, BC V6B 4N9 Tel.: (64) Fax: (64) Ce rapport est aussi disponible en français sur demande. The Investment Dealers Association of Canada is the national self-regulatory organization and representative of the securities industry. The Association s mission is to protect investors and enhance the efficiency and competitiveness of the Canadian capital markets.