Canadian bonds losing their lustre
Oil’s price crash is doing more damage than initially predicted
Foreign investors could soon end their love affair with Canadian bonds as a darkening picture for the federal government’s budget and ongoing oil- price weakness take a toll. Statistics Canada noted this week that Canada’s bond market in June had its first monthly outflow since 2013.
Though the reason for the outflow was a significant maturing of provincial and corporate debt, economists note that there could be a slowdown in the next year in the amount of cash foreign buyers sink into Canadian government and corporate debt.
“Beyond the inflow into moneymarket instruments, the theme of caution among international investors when looking at the Canadian market remains in place,” said David Tulk, chief Canada macro strategist at TD Securities. “We expect that the recent push lower in the price of oil will weigh on private corporate debt and lead to more hesitation on purchases of longer- term government debt.”
Foreign investors bought $ 8.5 billion in Canadian assets in June, following a sell- off of $ 5.45 billion in May. The biggest gains were in the money market, with a record $ 12- billion net inflow. Nearly $ 9 billion of net flows left Canadian bonds, however.
“For the first time since 2013, foreigners divested from bonds,” said Krishen Rangasamy, senior economist at National Bank Financial, though he notes the sell- off was “entirely due to provinces which saw the biggest foreign divestment on records.”
Nevertheless, the outlook around corporate and government debt continues to look muted as Canada struggles to shake off the damaging effect of oil’s price crash.
It has become increasingly clear that the crash is doing much more damage to the Canadian economy than initially predicted. Gross domestic product contracted by 0.6 per cent on an annual basis in the first three months of the year, and there was a broad pullback in many sectors, including oil and gas, wholesale trade and manufacturing. Economists at the start of the year forecasted the Canadian economy would bounce back in the second quarter, but now believe it likely contracted then as well. If that pans out, Canada will have entered into its first technical recession, defined as two consecutive quarters of economic contraction, since 2009.
Finance Minister Joe Oliver said in a speech last month that he does not buy the recession thesis and reaffirmed that the federal Conservatives will run a budget surplus this year. But a report from the parliamentary budget officer contradicted him a few days later, saying it is likely the government will have a billion- dollar deficit.
We expect that the recent push lower in the price of oil will weigh on private corporate debt and lead to more hesitation on purchases …