Bond yields plunge in wake of interest rate hike

Plenty of opportunity for issuers to lock in low borrowing costs

If there ever was a time for corporate Canada to be more adventurous in the bond market, it’s now.

Yields on 30-year government debt have plunged to more than a decade-low relative to the short end in the wake of the Bank of Canada’s latest interest rate hike.

That means there’s plenty of opportunity for issuers to lock in low borrowing costs for longer, especially since demand for long-term debt is “absolutely huge,” as central bank Governor Stephen Poloz said last week.

Yet corporate issuance of long-term bonds is lower this year than in 2017, even though the spread between two-year and 30-year bonds was more than 75 basis points wider a year ago and bond sales across all maturities are heading for a record this year.

Two-year government bonds yielded about 1.93 per cent on Wednesday, while 30-years traded about 2.20 per cent, leaving the difference between the two at 27 basis points.

The spread shrank to 23 basis points on July 11 after the Bank of Canada raised its benchmark interest rate to1.5 per cent. That was the narrowest since before the financial crisis in 2007.

At this time last year, when the central bank was only starting to tighten monetary policy, the spread was more than 100 basis points. While yields on Canada’s 30-year bonds fell seven basis points in the past 12 months, two-year yields have risen 71basis points, increasing the relative attractiveness of longer bonds from the issuer’s perspective.

“In spite of a flatter yield curve, we have not experienced an increase in corporate issuance at the longer end in Canada,” said Marc St-Onge, managing director and global head of debt capital markets at Canadian Imperial Bank of Commerce.

“We expect to see more do- mestic corporate issuance in the long end as conditions remain favourable.”

CIBC was the sole lead on Canada’s largest 30-year corporate bond this year, $800 million of securities issued by TransCanada Corp. in June.

But issuance of bonds of 30 years or longer has totalled $4.6 billion this year, compared with $5.9 billion in the same period a year ago, according to data compiled by Bloomberg.

Total corporate bond issuance is at $66.7 billion year-to-date, the highest since at least 2007 when Bloomberg started tracking the data, and on course to beat last year’s record of almost $110 billion for the full year.