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
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