Bond issuance balloons as BoC clarifies rate path

Sales surge results in busiest day in nearly 2 months as Canadian yields rise

Investors devoured $1.85 billion of new bonds at the tightest spreads in years after the Bank of Canada made clear it wasn’t in a rush to hike interest rates aggressively. The busiest day in Canadian dollar bond issuance in almost two months bodes well for future supply.

Toyota Credit Canada Inc. was the first out of the gates early on Thursday, followed by H&R Real Estate Investment Trust and U.K.-based Lloyds Banking Group Plc, which returned to the maple bond market after a six-year hiatus. Quebec also made its first foray into the bond market in six weeks.

The sales surge brought an end to a quiet start of the year as borrowers may have been waiting for policy clarity from the Bank of Canada, according to Jason Parker, head of fixed-income research at BMO Capital Markets.

“These are good times for the issuers and tougher times for portfolio managers, but some of them are seeing a bit of a relief from an all-in perspective, because even as spreads are lower, Canada government bond yields are higher, and that’s why they’re willing to continue to play in spread product,” Parker said by phone.

Toyota priced $600 million of bonds divided between two-anda-half-year floating-rate notes and five-year fixed-rate securities. It sold the five-year bonds paying as little as 68 basis points over the Government of Canada yield curve, making it the lowest spread for a five-year Canadian corporate bond in years. That compares with 70 basis points paid by John Deere Canada Funding Inc. last week and 74 basis points that Canadian Imperial Bank of Commerce offered investors when it sold same-maturity deposit notes last month.

Both H&R REIT and Lloyds increased the size of their transactions from initial targets, with the Toronto-based trust eventually pricing $250 million of five-year notes and the U.K. bank as much as $500 million of seven-year securities.

Quebec sold $500 million of September 2027 debt at a spread of 54 basis points over similar-maturity Canada bonds, the tightest the province has sold the bond at.

The Bank of Canada indicated on Wednesday that it’s in no rush to pursue aggressive interest rate hikes, citing “important unknowns” such as the future of NAFTA as it increased its benchmark rate to 1.25 per cent.

Canada’s economy needs to run a little hot to test out its full potential, governor Stephen Poloz said in an interview with BNN, Bloomberg’s Canadian TV partner.

The yield on Canada’s five-year government bonds rose one basis point to 2.02 per cent Thursday, heading for the highest close since 2013. The average spread on Canadian corporate bonds fell to 92 basis points, the lowest since 2007, according to a Bloomberg Barclays index.

The team BMO’s Parker heads last week raised its forecast for corporate issuance in Canadian dollars this year by $10 billion to between $95 billion and $100 billion.