Fixed Income   |   Feb 19, 2020

The Debt Canary

Coal miners used to carry canaries down into the jobsite – the birds were used as indicators that deadly gases were in the atmosphere. If the canary died, the miners fled to the surface.

Jean-Guy Mérette
Portfolio Manager, Fixed Income

In the fourth quarter of 2019, there were 35,155 consumer insolvency filings, according to Canada’s Office of the Superintendent of Bankruptcy. That’s the highest since 2010 and about 5,000 shy of the record reached in the third quarter of 2009. For the full year, over 137,000 Canadians declared bankruptcy, 9.5% more than the previous year – the fastest annual increase in a decade. Historically, such an increase in consumer bankruptcies was a result of weaker employment conditions following an economic slowdown. But today, one can hardly blame those bankruptcies on the wider economy – the Canadian unemployment rate is near record lows at 5.5%, compared to about 8.6% in 2009, and the economy is running near potential.

In our view, it’s more likely that the increase in insolvencies has been driven by the greater debt burden Canadians have taken on of late – the ratio of debt to disposable income in Canadian households has increased from 161% a decade ago to 176% today. Certainly, the lower rate environment has spurred more households to borrow, but the increase in household debt has also been driven by creative lending. For example, it’s now common for car dealers to coax customers to trade in their one-year old cars (and their associated loans) for brand new ones – and thereby extending the loan by dozens of months.

All this to say that while the hard data such as employment, GDP and corporate credit look healthy, we’re keeping a close eye on recent bankruptcy data, and hoping that it’s not our canary in the coal mine.  

Jean-Guy Mérette

Vice President and Portfolio Manager
Active and Strategic Fixed Income Team

Disclosures

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.

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