Provincial bond market shows resilience, says BoC

New research from the Bank of Canada (BoC) provides evidence that provincial bond markets are exhibiting resilience, allaying liquidity concerns.

Respondents to a 2016 BoC survey said they sensed a deterioration in liquidity of provincial bonds on the secondary market, which they attributed to regulatory or technological changes that reduced dealers’ ability or willingness to act as market makers.

While the central bank’s new research finds that a proxy for bid-ask spread in the provincial bond market has increased modestly in the last eight years—an indication of modest liquidity deterioration—all other measures of liquidity and trading activity are stable or have improved.

“These results are consistent across bonds from different provinces, older and newer bonds, and bonds of different sizes,” says the BoC in a staff note on the research.

Alberta is an exception. The province’s bond trading activity grew dramatically after the oil price shock in 2014-15, as issuances increased. The province’s bonds were eventually downgraded by credit rating agencies.

“Yet measures of trading activity show marked improvements following the issuance of several large bonds,” says the BoC in the note. For example, average trade size and turnover ratio increased, while the share of zero-trade days declined.

“These results indicate that, in the case of Alberta, the positive effect of issue size on liquidity and trading activity has dominated the negative effect of lower credit quality,” says the report.

The evidence from Alberta along with the data from the market proxies are interpreted “as a sign of resilience in provincial bond markets,” says the note.

Since the Great Recession, the total value of Canadian provincial bonds outstanding has more than doubled, says the BoC, going from about $300 billion to just over $600 billion. Their value now surpasses that of Government of Canada bonds and corporate bonds. At the end of Q2, provincial bonds made up 24% of total outstanding bonds denominated in Canadian dollars.

For full details, read the BoC research note.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.