CAPITAL MARKETS RESEARCH

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1 CAPITAL MARKETS RESEARCH INVESTMENT D E A L E R S ASSOCIATION OF CANADA Trends in Secondary Debt Trading January - December Signs of Recovery in Latter Part of the Year July 2001 Overview The slide in turnover in the Canadian debt market began to taper off in the final quarter of as the rate of decline in Canadas trading, characteristic since 1998, began to slow. While the decline in Canadas trading eased, trading in provincial bonds experienced its first annual drop in three years. Provincial turnover for 4Q remained flat compared to the previous quarter. The downturn in Government of Canada T-bill trading also began to stabilize in the October - December period of following two quarters of negative growth. overall in, finishing at just over $3 trillion. Although trading activity in Canadas continues its slide, the overall pace of decline eased in. According to the federal government s October Economic Statement and Budget Update, the surplus for the fiscal year / 01 was forecast at $11.9 billion, of which a minimum $10 billion was committed to reducing outstanding debt. Based on the financial results to the end of March 2001, a budgetary surplus of at least $15 billion is now expected. All of this will be applied to reducing the net public debt. Canadas Trading Slide Slows Total trading in Government of Canada bonds decreased 3% in 4Q to $790 billion, or a daily average of just under $13 billion, compared to 3Q. Trading for 4Q remained flat in comparison with the year ago quarter. Year-over-year trading decreased 4% For the fiscal year /01, net bond issuance was negative for the second consecutive year. Redemptions outstripped issuance by $2.2 billion in fiscal /01. Gross issuance which includes the replacement of maturing issues of Government of Canada bonds increased 28% in 4Q to just over $12 billion following a drop in 3Q to just

2 over $9 billion. Gross issuance slipped 9% year-overyear, finishing at nearly $46 billion and was the lowest volume since This drop in issuance for the year was reflected in the overall slackening in trading for Government of Canada bonds compared with last year's volume. Non-resident holdings of Canadas dropped slightly quarter-over-quarter to just over $79 billion representing a $5 billion or 7% decline from peak levels in the second quarter and a 13% decline from 1999 levels. The share of outstanding Canada bonds held by non-residents dropped to 24%, which is lower than the 26%-27% share that has been the trend over the last couple of years. Gains in Corporate Bond Trading Lose Steam For the first half of, corporate bond trading increased 21% year-over-year, while in the last half of it grew only 6 per cent compared with the same period for Corporate bond turnover for maintained its 2% share of overall total domestic trading, which is in line with the market share for Total gross corporate new issuance, which includes foreign issuance, for 4Q dropped to just under $6 billion, a decrease of 21% compared with the previous quarter. Corporate issuance in the final quarter declined 46% from the nearly $11 billion raised in the same period for Annual corporate issuance was down 41% to $38 billion compared to the $64 billion peak volume raised in Most of the overall drop in corporate new issuance in was due to the decline in the foreign segment of gross issuance, which finished at just under $13 billion for the year, a 64% decline compared to 1999 levels. The domestic portion of gross corporate new issuance in 4Q was down 15% compared with the previous quarter's total to nearly $5 billion and also contributed to the overall decline. This is down nearly 30% from the same quarter in Major issuers for 4Q included Research in Motion Ltd. ($929 million), as well major issuers from the financial sector, RBC Capital Trust ($750 million), Royal Bank of Canada ($575 million) and Daimler Chrysler Finance ($350 million). Total corporate outstandings for the year finished at $384 billion, an 8% increase over the 1999 level. At the same time, the domestic portion of corporate holdings reached $235 billion, up 17% from 1999 levels and the highest in the last five years. Quarterly domestic holdings remained steady in 4Q and increased 9% compared with the same quarter a year earlier. Meanwhile non-residents holdings of corporate bonds dipped slightly to just under $149 billion in 4Q but represented a 7% increase over the same period a year earlier. Provincial Bond Trading Registers First Annual Drop in Three Years Total corporate bond trading activity increased 5% quarter-to-quarter in the October-December period, to just under $41 billion or a daily average of $657 million, and was 15% higher than the same period in At the same time, the volume in the fourth quarter approached the record level of just under $43 billion recorded in 2Q and rebounded from an almost 10% decline from 2Q to 3Q. Total trading in provincial bonds for 4Q remained steady over the previous and year-ago quarters at $69 billion or a daily average of just over $1 billion. Annual provincial bond trading activity, however, declined for the first time since 1997, falling 15% to $283 billion compared to the 1999 total. For the /01 fiscal year most of the provincial governments recorded budget surpluses and are committed to debt repayment. Debt repayment 2 Trends in Secondary Debt Trading

3 1999 total. Other term securities continue to expand its share of overall asset backed securities outstanding to 36%, the largest percent share for this category since reduces the volume of bonds outstanding which results in a less liquid market and in turn contributes to the drop in provincial bond trading activity. Gross provincial issuance, which includes redemptions, fell 43% quarter-to-quarter to just over $4 billion in 4Q and 28% lower than the same period in In line with the provincial governments commitment to debt repayment, annual provincial issuance dropped 19% year-over-year to $28 billion. Municipal Bonds Bounce Back Total trading in municipal bonds this period continued its recovery from the third quarter, increasing 12% to $2.2 billion or a daily average of $35 million, although this is down 19% for the same quarter in The first two quarters of recorded negative percentage growth dropping over 30% year-to-year in the first half. Even with the fourth quarter rise, overall municipal bond trading for dropped another 3% after dropping 10% in The asset-backed securities market (ABS) increased 29% year-over-year, finishing at $53 billion in. This represents a peak volume for this category since 1993 and follows a 50% increase in asset backed securities outstanding in Money Market Trading Total trading in Government of Canada T-bills continued its decline in 4Q, dropping another 2% from the previous quarter to $240 billion, or a daily average of $3.9 billion. This was also down 18% from the year ago quarter and contributed to MBSs Continue to Dominate ABS Market Mortgage backed securities (MBS) outstanding for rose 23%, to $34 billion, compared to the yearearlier total. MBSs continue to dominate the overall asset-backed market with a 64 per cent share, although this is down 4% from the 1999 per cent share of outstandings. Other term securities outstanding (excluding MBSs) for finished at $19 billion, up 44% from the Trends in Secondary Debt Trading 3

4 the 6% decrease in Canada T-bill trading for the year compared to the 1999 total. Trading in Government of Canada T-bills has been decreasing since 1995, although the pace of decline has begun to taper off. The year-over-year percentage drop for has slowed to 6%, compared to the double-digit declines for the previous four years. As the T-bill market becomes more illiquid, investors continue to turn to the Bankers Acceptances sector of the money market. For example, in 3Q, total trading in BAs rose 18% over the previous quarter while correspondingly, T-bill trading activity dropped 17% in the same quarter. Total trading activity for 4Q saw Bankers' Acceptances dip slightly to $335 billion or a marginal 3% compared to the previous quarter while T-bill trading experienced a similar drop in trading activity. However, trading activity in 4Q for Banker s Acceptances represented a 18% increase over the same period in 1999, at the same time, T-bill trading activity in the same period dropped 18%. Annually, trading in BAs was up 11% over the 1999 volume, totaling $1.3 trillion and has recorded positive annual growth since In contrast, T-bill trading activity for the year was down 6% and has recorded negative percentage growth since Trading in commercial paper (CP) moderated in the final quarter, declining 2% to $644 billion or a daily average of just over $10 billion in 4Q. Annually, CP trading increased 13%, to $2.7 trillion, compared to the 1999 volume. Compared with the same period a year ago, growth in the second half of rose a meager 5%; this comes after a 21% increase for the first half of compared with the same period in At the same time, growth in commercial paper outstandings has also begun to moderate. While total outstandings in this category increased 13% yearover-year to $131 billion, this is the lowest annual per cent increase since Securitizations continue to increase, albeit at a slower pace compared to previous years, rising 14% to $60 billion compared to last year. Allison Jones, Research Coordinator Capital Markets Department (416) ajones@ida.ca Turnover in BAX rose slightly in 4Q compared to the previous quarter, increasing 6%, with a daily average of just under 16,000 contracts traded in 4Q. This follows the daily average low for the year of 15,000 contracts traded in 3Q. 4 Trends in Secondary Debt Trading

5 Secondary Market Debt Trading Bond Trading (daily average, $ millions) Q '00/Q3'00 '00/' % chge Canadas 12,745 13,185 12,499 (3.3) ,139 13,575 (3.2) 18,247 20,760 Provincial 1,119 1,114 1, ,126 1,315 (14.4) 1, Corporate (5.5) Municipal (16.7) (1.1) Money Market Trading (daily average, $ billions) Treasury bills Bankers' acceptances Commercial paper Q '00/Q3'00 '00/' % chge (2.5) (15.2) (4.5) (3.6) (1.9) Source: Bank of Canada, IDA Trends in Secondary Debt Trading 5

6 NOTES

7 INVESTMENT D E A L E R S ASSOCIATION OF CANADA CALGARY Suite Fourth Ave. S.W. Calgary, Alberta T2P 0J1 Tel.: (403) Fax: (403) HALIFAX TD Centre, Suite Barrington St. Halifax, Nova Scotia B3J 3K9 Tel.: (902) Fax: (902) MONTRÉAL Bureau Place Ville Marie Montréal, Québec H3B 4R4 Tel.: (514) Fax: (514) TORONTO Suite King St. W. Toronto, Ontario M5H 3T9 Tel.: (416) Fax: (416) Ce rapport est aussi disponible en français sur demande. The Investment Dealers Association of Canada is the national self-regulatory organization (SRO) and trade association of the securities industry. The Association s role is to foster fair, efficient and competitive capital markets by encouraging participation in the savings and investment process and by ensuring the integrity of the marketplace. VANCOUVER Suite 1325 P.O. Box West Georgia St. Vancouver, BC V6B 4N9 Tel.: (604) Fax: (604) Printed on recycled paper