Public Sector Strategy

Transcription

1 Fixed Income Trading Desk Strategy Quick Hit Refi recon PLEASE SEE END OF DOCUMENT FOR IMPORTANT DISCLOSURES January 23, (Vol. 2, No. 5) My strategy colleague, Connor Sedgewick, offered up some nice analysis of corporate maturities before the holidays. The punch line: enlarged maturities could trigger record corporate bond supply in calendar 218 (~$115 billion in gross domestic issuance). Fair to say then that maturities have become a key driver of corporate supply; no major sector has seen refinancing activity mount as quickly (Chart 1). But maturities are exerting influence on funding needs in other segments of the market too. Here, we offer up a few takeaways (plus a handful of charts and a couple of detail tables) related to public sector debt profiles: There s some $17 billion (CAD equivalent) of federal-crown-provincial-municipal bonds coming due in the next year. That s a lot of bonds, but at roughly 1% of outstandings, the general government sector faces less immediate debt rollover risk than Canadian corporates or households. Consider that roughly 2% of outstanding mortgage debt rolls in a given year. The public sector may have a relatively longer refi fuse, but maturities are nonetheless on the rise. You can trace much of that increase to the Government of Canada an issuer that has favoured a shorter-term bond strategy for some time. E.g., ~85% of domestic Canadas were auctioned in the 2- to 5-year tenors in 217, whereas provincials channeled <2% of their C$ bond supply to 2s to 5s (Chart 2). Having pursued fundamentally different debt strategies for a number of years, federal-provincial outstanding debt profiles have grown apart. To wit, 11% of the existing GoC bond stock matures inside of one year, about double the corresponding provincial government average (Chart 3). Being generally of an older vintage, the provincial bonds set to mature in 218 carry a weighted average coupon still north of their current indicative cost of funds (Chart 4). [Don t lose sight of the fact that the stock of GoC T-bills has declined notably. In this way, Ottawa has reduced its most immediate interest rate reset risk, since nothing rolls like a bill. But here again, the provinces collectively face relatively less interest rate reset risk, given their proportionately smaller stock of outstanding bills/cp.] One need appreciate that sector-wide readings on average term or coupon for provis, munis or corps mask significant dispersion from issuer to issuer. Take a glance at the variation in weighted average term of outstanding bonds by issuer, illustrated in Chart 5. In provi land, there s the equivalent of $5 billion maturing in the coming 12 months. Domestic bonds comprise ~7% of that amount. As per our recent note on provi supply expectations, refinancings look to account for one half of the $68 billion in C$ provi bond supply we expect to get in calendar 218. The resulting pace of net C$ provi bond supply, at $34 billion, would be largely in-line with last year s run rate. Alberta is due to make another outsized contribution to net provincial issuance, while Québec s domestic bond stock should continue to see little growth. As for the $14 billion (CAD equivalent) of looming provincial foreign currency maturities, the bulk are USD securities (Chart 6). Assuming something like US$1 billion in dollar supply from the provinces this year, the outstanding stock of USD provis likely won t be much changed in a year from now. At this stage then, net supply doesn t appear as a significant near-term threat to USD provi spreads. In muni land, the sinking fund/amortizing nature of many debt securities means maturities theoretically hold less sway on supply. Saying that, the MFA of BC, with over $1.2 billion of bonds coming due in 218, is one issuer where we can expect refi-related activity in 218. In spite of Canada s apparent focus on public sector infrastructure investment, the outstanding stock of muni bonds was largely stagnant last year and likely won t grow much over the coming year a positive technical consideration for muni spreads. Finally, what of prospective implications for the FTSE TMX bond index? Interestingly, while refi activity is generally headed higher, at this point there are proportionately fewer bonds set to roll down from the long term bucket into mid term category in 218 compared to prior years. Our analysis shows 2.8% of long term index bonds set to drop out over the course of 218 vs 4.7% at this time last year. That could potentially dull the index-related bid for longer-dated bonds that tends to crop up at key seasonal junctures, although index adjustments will ultimately hinge on marginal supply, including how heavily provinces rely on new 1s (e.g., 228 maturities). My colleague, Catherine Maltais, provides good colour on index-related adjustments and will have more to say on this. Chart 1: Maturities mounting (notably corps) Annualized Canadian bond retirements by sector C$bln (4Q sum) GoC Muni Source: NBF, StatCan Note: Includes domestic & international bonds Provi Corp Chart 2: Fed-prov funding strategies opposed Composition of C$ bond supply by bucket (calendar 217) Source: NBF, Bloomberg Warren Lovely Fixed Income Trading Desk Strategy % >1Y 6-1Y 1-5Y Gov't of Canada >1Y 6-1Y 1-5Y Provincial aggregate

2 CAN EDC CANHOU CPPIB PSPCAP CADEPO ONT ALTA Q NBRNS NS BRCOL MP NF SCDA PRINCE QC BCMFA VANC MNTRL YORKMU TRNT PEEL SOUCOA OTTAWA WINNPG Public Sector Strategy January 23, 218 Chart 3: GoC bonds roll much faster than provis Cumulative share of outstanding bonds coming due within 5 years Chart 4: Re-couponing still favourable for provis Weighted average coupon of maturing C$ bonds vs cost of funds 7 6 % of bonds o/s GoC Provi aggregate % Bonds maturing <1Y Blended cost of funding* Within 1Yr 2Yrs 3Yrs 4Yrs 5Yrs. Gov't of Canada Provincial aggregate Source: NBF, Bloomberg Note: Includes domestic & international bonds Source: NBF, Bloomberg * Based on 217 bond mix; provincial cost of funding based on Ontario Chart 5: Perspective on average term to maturity in fed-crown-pension-provi-muni sectors Weighted average term to maturity (WATM) of outstanding marketable bonds by sector/issuer 3 Years Source: NBF, Bloomberg Note: Includes domestic & international bonds; within each sector, issuers sorted by WATM; for provinces, includes guaranteed bonds; for municipal sector, we ve included 1 of the largest issuers (based on current bonds outstanding) Chart 6: Provincial debt profile shows C$5bln maturing in coming year and even more in 219 Current distribution of outstanding marketable provincial government bonds (direct & guaranteed) by currency of issue $bln (CAD equivalent) Other EUR USD CAD >4 Source: NBF, Bloomberg Note: Horizontal axis represents remaining years to maturity (e.g., 1 signifies bonds due within 1 year) Warren Lovely Fixed Income Trading Desk Strategy 2

3 January 23, 218 Table 1: Detailed look at public sector bonds outstanding by currency of issue FEDERAL & PROVINCIAL DEBT OUTSTANDING D istribution and share of outstandings by currency of issue Amount outstanding (Par value, C$billion) Share of outstandings by currency (%) As at 23-Jan-218 All CAD USD EUR Other All CAD USD EUR Other Government of Canada Canada Housing Trust Export Development Canada Provincial Total British Columbia Alberta (incl. ACFA) Saskatchewan M anitoba Ontario (incl. OEFC) Québec (incl. Fin-Q, HQ) New Brunswick (incl. NB M FC) Nova Scotia Prince Edward Island Newfoundland and Labrador (incl. Hydro) TOTAL (Federal + Provincial) 1, , Note: Based on marketable bonds outstanding Source: NBF, Bloomberg Warren Lovely Fixed Income Trading Desk Strategy 3

4 January 23, 218 Table 2: Detailed look at public sector bonds outstanding by remaining term to maturity FEDERAL & PROVINCIAL DEBT OUTSTANDING D istribution by remaining term to maturity (all currencies) Gross maturities coming five years (C$billion) Share of outstandings (%) Weighted average As at 23-Jan-218 1Y 2Y 3Y 4Y 5Y <=5Y 6-2Y >2Y Term (Yrs) Cpn* (%) Government of Canada Canada Housing Trust Export Development Canada Provincial Total British Columbia Alberta (incl. ACFA) Saskatchewan M anitoba Ontario (incl. OEFC) Québec (incl. Fin-Q, HQ) New Brunswick (incl. NB M FC) Nova Scotia Prince Edward Island Newfoundland and Labrador (incl. Hydro) TOTAL (Federal + Provincial) Note: Based on marketable bonds outstanding; weighted average coupon based on fixed-rate bonds only Source: NBF, Bloomberg Warren Lovely Fixed Income Trading Desk Strategy 4

5 January 23, 218 Fixed Income Trading Desk Strategy Public Sector Strategy Corporate Credit Warren Lovely Connor Sedgewick Catherine Maltais Pete Metzger Relative Value Models Drew Lloyd +44 () Important Disclosures General This Report was prepared by National Bank Financial, Inc. (NBF), (a Canadian investment dealer, member of IIROC), an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange. The particulars contained herein were obtained from sources which we believe to be reliable but are not guaranteed by us and may be incomplete and may be subject to change without notice. The information is current as of the date of this document. Neither the author nor NBF assumes any obligation to update the information or advise on further developments relating to the topics or securities discussed. 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