Money in the Bank (of Canada)
In April, the Bank of Canada announced that it would launch both a $50-billion Provincial Bond Purchase Program and a $10-billion Corporate Bond Purchase Program. The former began operations on May 7th and the latter on May 26th. The program’s impact was immediate as we can see in the chart below, with both provincial and corporate spreads dropping about 20 basis points on the day of the announcement (the grey line). Yet since then, corporate spreads have continued to tighten while provincial spreads have somewhat plateaued. Why?
Undoubtedly, the resurgence of the stock market has contributed somewhat to the corporate spread tightening, yet we believe that the divergence between provincial and corporate spreads of late is largely related to supply and demand dynamics on the secondary market. On the primary market, companies have largely surpassed their issuance level compared to the same period last year, with the bulk of the supply coming during the month of May, and investors have been receptive. The situation has been similar in provinces. However, in the secondary market, we’ve seen many portfolio managers rebalance their portfolios to increase their corporate exposure at the expense of provincial bonds, seeking to profit from corporate bonds’ greater upside potential. With spreads between corporate and provincial bonds remaining relatively wide at around 80 bps, we believe that the current trend will continue and that corporate spreads will continue to tighten in the short- and mid-term horizon.
Vice President and Portfolio Manager
Active and Strategic Fixed Income Team
This information is prepared by Fiera Capital Corporation (“Fiera Capital”) and is intended for use by residents of Canada only. The information and opinions expressed herein are provided for informational purposes only, are subject to change and should not be relied upon as the basis of any investment or disposition decisions. Past performance is no guarantee of future results. All investments pose the risk of loss and there is no guarantee that any of the benefits expressed herein will be achieved or realized. Valuations and returns are computed and stated in Canadian dollars, unless otherwise noted.
The information provided herein does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information. Any opinions expressed herein reflect a judgment at the date of publication and are subject to change. Although statements of fact and data contained in this presentation have been obtained from, and are based upon, sources that we believe to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. No liability will be accepted for any direct, indirect or consequential loss or damage of any kind arising out of the use of all or any of this material.
Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any funds or accounts managed by any Fiera Capital entity. Each entity of Fiera Capital only provides investment advisory services or offers investment funds in the jurisdictions where such member and/or the relevant product is registered or authorized to provide such services pursuant to an exemption from such registration.