LONDON - Global trade developments may dictate how lively Canadian corporate bond sales are next year. Trade tensions, which increased volatility and caused sales in the Canadian corporate securities market to collapse in the fourth quarter, are poised to continue. Issuers pulled back from the market in the fourth quarter and in 2019 volatility may put investors in the driver’s seat in terms of pricing leverage for the first time in about a decade. Dealers will restart business in January in this new landscape after a rise in risk spreads this quarter caused Canadian companies’ bonds to trade at yields last seen in the second half of 2011, according to a Bloomberg Barclays total return index. The extra yield over the government bonds has increased by 33 basis points since Sept. 30 to 143 basis points, as trade concerns rose. “Volatile environments provide new issue investors with more pricing leverage,” said Sean St.John, co-head of fixed income, currencies and commodities, at National Bank Financial.
“This in turn will keep new issue concessions elevated.”
Canada became the centre of the U.S and China trade dispute after the Dec. 1 arrest in Vancouver of Huawei Technologies Co. Chief Financial Officer Meng Wanzhou following an extradition request from the U.S. The $2.2-trillion Canadian economy is particularly exposed to trade developments between the two nations because the U.S. is home to three quarters of Canadian exports while China is a highly sought-after partner.
“The geopolitical risk around trade is still very big factor and concern,” said BlackRock Inc.’s head of Canadian fixed income Aubrey Basdeo. “At the moment the volatility in the market is really reflecting sentiment around trade concerns.”
This uncertainty drove Canadian-dollar denominated corporate bond sales during the last quarter to $10.8 billion, the lowest for that period since since 2008 after the bankruptcy of Lehman Brothers Holdings Inc. Banks, which accounted for at least half of the issuance in the previous quarters, reduced their issuance to a fraction of typical sales. Investors demanded more spread to hold senior bail-in bonds, a new type of bank debt which eventually could be converted into equity, if their lower-ranking reserves aren’t enough to offset losses.
