Foreign investors dump Canadian bonds in June

June saw the largest foreign divestment in Canadian bonds since 2007. But equities found favor among foreign investors in spite of weakness in the share index.

Non-resident investors reduced their holdings of Canadian securities by $15.4 billion in June, the largest reduction since October 2007, according to Statistics Canada’s monthly report.

Non-resident investors reduced their holdings of Canadian bonds by a record $19 billion in June, marking the first divestment in 2013. The decline was largely accounted for by bonds reaching maturity, as well as by secondary market sales.

StatsCan said the divestment focused on federal government and its business enterprise bonds and, to a lesser extent, provincial government bonds. This occurred against the backdrop of a sharp decline in the overall supply of these instruments over the month. Slightly moderating this activity were foreign acquisitions of $1 billion of Canadian private corporate bonds on the secondary market, the 15th straight month of such investment by non-residents.

Foreign investment in the Canadian money market slowed to $400 million in June from $3.5 billion in May. Acquisitions of provincial paper were partially offset by a reduction in Treasury bills, for which the overall supply slowed in the month.

The differential between Canadian long- and short-term interest rates widened in June as long-term rates were up 43 basis points. The Canadian dollar continued to depreciate against its US counterpart and was down by 1.4 US cents.

Foreign investors favored Canadian equities and added $3.2 billion in the month, making for a third straight monthly investment and the largest inflow since September 2012. This activity was mostly related to new issues of corporate shares. Non-residents also acquired Canadian shares on the secondary market, led by energy and banking shares.

In spite of foreign buying, the Canadian stock market slid 4.1% in June to reach its lowest level since August 2012

Canadian investors, meanwhile, resumed their acquisition of foreign securities by adding $3.7 billion to their portfolios in June, favouring US debt instruments and non-US foreign equities, sharply reversing the $1.7 billion divestment in May.

Canadian investment in foreign bonds strengthened to $2.2 billion and was evenly split between US government and corporate bonds. Canadians acquired $1.5 billion of foreign equities in June as they purchased non-US foreign equities for a fourth consecutive month. They also acquired US stocks, following three months of divestment.

Global equity markets were down in June, with US stock prices retreating 1.2%.