As BoC holds on hike, big banks borrow big

Massive bond sales staged by Canada’s large financial institutions indicate expectations of higher rates

As BoC holds on hike, big banks borrow big

The Bank of Canada justified its decision to hold benchmark rates low last week by explaining that the business outlook was still uncertain and there is still slack in the economy. However, the central bank’s news release also noted a shift in market sentiment, specifically a rapid increase in global yields after the US elections.

The move in markets, based on expectations of inflation through government spending under US President-elect Donald Trump, has prodded Canada’s big banks to go on a bond-selling spree with the intention to lock in debt at current rates. The past two weeks have seen $6 billion in bond sales from banks, with corporate Canada set to continue to tap credit markets this week, according to the Globe and Mail.

“As a rule of thumb, 80 per cent of any move in U.S. interest rates will be passed through to the Canadian corporate bond market,” said Desjardins Securities credit market analyst Jean-François Godin. Godin said that financial firms have issued bonds most actively since the US election, while utilities, industrials, and provincial issuers are also ratcheting up bond sales.

Scotiabank’s $1-billion sale of five-year bonds at 1.9% interest, which was increased to $2.25 billion to accommodate investor demand, was the biggest in recent weeks. A $1-billion sale of seven-year bonds at 3.146% interest was also later bumped up to twice its original value in the face of intense demand.

Getting on the bond sale bandwagon, Bank of Montreal and Royal Bank of Canada staged $1.25-billion bond financings last week, while CI Financial issued $200 million in five-year debt. The demand has been generated by a wide range of investors, from pension funds to RRSP holders, who want to get more fixed income from corporate paper and easing up on federal government debt.

Sovereign yields are still on the thin side, with the US 10-year bond currently yielding 2.46%. Bond investors hungry for more have been turning to traditional investment-grade issuers such as banks and utilities.

Junk bonds issued by non-investment-grade companies have also been profiting from residual unsatisfied demand. Ritchie Bros. Auctioneers managed to raise US$500 million by selling bonds that offer 5.375% interest, while Calgary-based fracking industry supplier Source Energy Services was able to sell $150 million worth of debt at 10.5% interest via a private placement.

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