Bank deposit notes outperform corporates; federal, provincial notes popular safe havens

By Rebecca Melvin

New York, June 1 - Canadian corporate bond spreads continued to widen Friday on the heels of a much weaker-than-expected U.S. nonfarm payrolls report for May.

Bank deposit notes were wider by 3 basis points to 5 bps, outperforming other bonds, including corporate bonds, which widened by 5 bps to 10 bps, according to market sources.

The wider spreads were more a function of liquidity than credit, sources said. The bank deposit notes widened less because they are more liquid than the corporate paper, a bond strategist said.

Driving the market is a flight to safety of capital, and particularly a flight of European capital out of Europe due to fears related to the euro zone debt crisis.

"Canada rates are at all-time lows, and spreads widened out. It was not a great finish to the week," a corporate bond specialist said, citing the much weaker-than-expected U.S.jobs report for the moves and adding that it wasn't just the May report, but that previous months were revised downward as well.

As for why spreads and yields are where they are, a fixed-income strategist said, "It's about a return of capital rather than a return on capital because you're getting next to nothing."

U.S. employers created 69,000 jobs in May, which was significantly below expectations for a gain of 158,000 jobs, and the unemployment rate ticked up to 8.2% from 8.1%. There were also downward revisions on the number of jobs created in March and April.

In addition China's May purchasing managers' index, or PMI, came in weaker than expected, falling steeply to 50.4, from 53.3 in April, and below market expectations for a reading of 51.5.

The terrible May jobs report dashed hopes for U.S.-led strength among the limping world economies, and Canadian and U.S. stocks responded Friday with significant percentage drops.

The broader markets were enough to scare away would-be issuers in either the corporate or provincial markets, although Capstone Infrastructure Corp. priced about C$100 million of debt, comprised of C$80.4 million of 4.6% senior secured bonds with a 28-year maturity, and C$20.2 million of 7% subordinated secured bonds with a 29-year maturity.

The Capstone bonds, which will be used to recapitalize the company's hydro power facilities, was a private placement that will be secured by those facilities.

TD Securities Inc. acted as the arranger of the bond placement.

June 1 is a large coupon date and marks a short season of coupon payments, so market players are anticipating a flurry of issuance and secondary market activity on the back of more funds being available to investors.

A fixed income strategist said that weak broader markets are unlikely to keep issuers at bay and that the only reason that there was no issuance on Friday was because it was Friday and issuance tends to be focused on the beginning of the week when investors are more focused on markets.

Government bonds surged on Friday with the Canadian two-year paper yielding 0.877% Friday, down from 1.064% Thursday. The 10-year note was yielding 1.630% from 1.740%.

Liquidity is the driver

Heading into the new month, dealer inventories are pretty stuffed, having been at the receiving end of selling during May and finding buyers few and far between in light of heightening euro fears and dimming economic prospects for the U.S. and China economies as well as the European economy.

Going into May, inventories had been healthy. But they were torpedoed early by the French and Greek elections early on in the month, according to a source.

"Dealers couldn't find buyers, and can't provide the liquidity," the source said.

The global economy is turning down, and the euro zone may break up, so money is fleeing out of Europe and flocking to the U.S., Canada and Germany, he said.

All sectors hit hard

Some of the beta sectors were weaker than others. Telecom, real estate, media, and securitization have more pronounced weakness, while retail has held in as has insurance because of the pain there suffered last year, a source said.

But infrastructure, utility, and oil and gas pipelines were all wider by 5 bps plus, he said.

He said investors will maintain a conservative approach for the foreseeable future.

The worst-case scenario would be if the markets gets into more panic selling, he said. If the Dow Jones industrial average sees a few more days of 100-plus losses, "people will get more jittery," he said.

In addition if there are more headlines about investors taking their deposits out of European banks, that could spark a further tailspin.

"People seem to be living from headline and headline," he said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.