Debt issuance surged in Q3

Despite offering low returns, the debt market in Canada had its second best quarter on record, according to the Investment Industry Association of Canada’s Review of Debt New Issues and Trading for Q3. Total debt issuance increased 20.8% — to $45.7 billion — over last quarter, and 23.2% from last year. “This past summer turned out to be a hot one,” says the report.

The IIAC chalks up the positive quarter to a variety of factors including the uncertainty of equities and an unchanged overnight rate.

“Even though interest rates were still at relatively low levels,” says the report, “the central bank’s decision to stand pat was welcomed by the bond market.”

Government bond financing improved in Q3. Issuance increased 8.9% over last quarter and 4.9% from last year. At a total of $16.9 billion, the IIAC attributes the upswing with the issuance cycle of the 30-year bond, which happens in the first and third quarters.

In the corporate bond market, issuance activity reached $14.7 billion, up 44% over Q2 and a 39.9% increase from the same time last year. A positive interest rate outlook and the demand for Maple bonds are two reasons for the good news, says the IIAC. Corporate bond trading, however, dropped 18.4% from last quarter to $35.3 billion.

Money market trading improved slightly this quarter; trading was up 3% to $949.9 billion. Compared to this time last year, total money market trading was up only 1%, at $2.8 trillion. The IIAC says the slight increase is related to advisors’ declining interest in Treasury Bills. T-Bill activity was down 7.9% over last quarter, and 29.2% from last year. “The declining interest in safe-haven T-bills is partly reflective of a more aggressive investor seeking higher market returns elsewhere,” says the report.

Totaling up the first nine months of 2006, debt trading increased 15.7% from this time last year to $5.1 trillion. Debt issuance totaled $127.8 billion year-to-date, an increase of 8.3% over the same period in 2005. “With these searing figures,” says the report, “the debt market in 2006 will likely go down as the hottest on record.” The IIAC expects the industry to shatter the issuance record of $165 billion set in 2004 and 2005’s trading high of $5.9 trillion.

The debt market isn’t expected to cool down this year, either. While the “growing search for high yield in foreign markets and widening credit spread are worrisome,” lower interest rates, strong investor demand and the burgeoning Maple market will balance out any of the industry’s negatives.

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