Debt markets

Last year saw a record amount of debt trade, according to the IDA’s latest Review of Debt New Issues and Trading. Total debt traded jumped 14.6% to $5.9 trillion in 2005, while new issuance slipped 8.8% to $151.5 billion.

“Of course, the road to last year’s grand finish was not without a speed bump,” the report says. “Activity hit a soft patch in the fourth quarter with financing and trading down 8.3% and 1.4% quarter-over-quarter respectively.”

The report calls the sustained low interest rate environment “nirvana for the debt market,” despite the Bank of Canada’s gradual, though steady, credit tightening policy.

“It did little to incite higher longer-term bond yields,” the report notes. “Instead, the longer end of the yield curve continued to flatten, keeping credit conditions lodged in the favorable camp and conducive for borrowing.”

Corporate financings totaled $64.9 billion for the year, topping the record set in 2004 by 6.4%. In the final quarter of the year there were 108 issues, worth $19.8 billion. The IDA credits the abolition of the foreign property rule for a sudden surge in so-called Maple bonds — foreign-issued debt, denominated in Canadian dollars.

“The FPR elimination immediately opened the floodgates to Maples as eager investors wasted no time in taking advantage of new investment capital and opportunities,” the report says. “Last year, foreign debt issuers in Canada accounted for about one-fifth of the total corporate financings with the U.S. leading the global borrowing pack.

“From the perspective of the global issuer, the Canadian market represents a new, competitive investment base to tap.”

Canadian corporations brought 2.1% fewer issues to market, but the dollar value increased by 6.4% over 2004.

While corporate issues were on the rise, the federal government slashed its issuance, reflecting the increasingly healthy fiscal situation. Ottawa issued $53.1 billion in new bonds in 2005, down 13.7% from 2004. Fourth quarter issuance fell to $6.7 billion, a drop of 58.6% quarter-over-quarter.

The provinces also issued less debt, when taken as a group, thanks to increased transfer payments from the federal government. Provincial financings rang in at $29.7 billion, down 24.8% from 2004. Even municipal issuance fell by 6.4%, despite a massive $500 million in new debt issued by Toronto to finance its transit system.

Foreign investors returned to the Canadian money market in 2005, after two years of “disinvestments,” boosting the paper trade. Overall trading in government T-Bills hit $1.5 trillion in 2005, up 9.7% from 2004.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com