Debt and Maple markets hit all-time highs

While debt trading might not be the sexiest investment option, these days it seems to be increasingly popular. On Thursday, the Investment Industry Association of Canada released its Q4 debt issuance and trading report, which found total debt trading at an all-time high of $7.1 trillion in 2006, besting 2005’s year-end total by 12%.

Debt issuance also broke records, reaching $185.2 billion last year, an increase of 18.5% from 2005 and surpassing the previous high of $166.1 billion set in 2004.

“The banner year was reflective of the nirvana-like conditions that prevailed in the fixed income market,” says the report. Tightening credit spreads, low interest rates, investor demand and a burgeoning mergers and acquisitions industry were the main reasons why the debt market performed so well.

Even more impressive was the surging Maple bond market. In Q4 2006, Maple issuance reached a record quarter high at $28.5 billion. The yearly total hit $81.1 billion, an increase of 27% over 2005.

The IIAC report cites the “scrapping of the federal foreign property rule” two years ago as the reason for the Maple market’s dramatic upswing. In the fourth quarter alone, the market saw 15 Maple issues — that equals the number of issues in all of 2005. These issues totalled $5.2 billion, up 61.7% over Q3 2006 and 304.3% year over year. Maple financing also made significant inroads, with an increase of 307.9% over 2005.

Ian Russell, the IIAC’s president, was surprised at how well Maple bonds performed in Q4. “What we had seen was this market starting to grow in 2005 and then a lot of issuance in early 2006 and then it tailed off,” he says. “It was good surprise to see that much financing to take place in the last quarter.”

It helped that big companies are making big deals. Morgan Stanley, with its $2.5 billion Maple issue last quarter, made the biggest Maple and corporate move in the Canadian financial markets, while HBOS Treasury Services, Goldman Sachs Group, the Royal Bank of Scotland and Merrill Lynch also made notable Maple issues in 2006.

With the frenzy over Maple bonds reaching an all-time high, investors might be worried that 2007 won’t be as hot. But the IIAC doesn’t expect a slowdown anytime soon. Preliminary data for Q1 2007 shows the market’s already had 30 issues at $13.1 billion — half of last year’s total number of issues.

Despite the positive outlook, Russell is worried that the infrastructure’s not in place for Maple bonds to become a viable investment alternative. He says the market needs to “mature and broaden” if it’s going to thrive. “We want to see a permanent marketplace for foreign-issued Canadian debt,” he says. “What we really want to do is exploit this and build a really deep marketplace for maple bonds.”

Maple bonds and domestic corporate debt weren’t the only markets to gain ground last year. Federal bond issuance increased 0.6% over Q4 2005 and 11% year over year. Crown corporations issued a total value of $74 billion in bonds, a 30.4% increase over 2005, while the Government of Canada’s direct borrowing declined 5.2% from 2005 levels, to $35.4 billion.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com