Canadian bonds are at an all-time low thanks to investor attention from Europe.
“Any country that looks like a safe haven and has better growth has been the recipient of a strong flow of funds,” says John Braive, vice chairman of CIBC Global Asset Management.
Our ten-year yields are about 1.7%—the lowest ever. As investors pull funds from the Eurozone, European banks are buying higher-quality assets in Canada.
He adds Germany has negative two-year yields and very low ten-year yields (1.44% as of yesterday). The U.K. also has very low ten-year yields (1.66% as of yesterday).
And how’s Greece faring? Its bonds are yielding more than 25%, and banks are managing their exposures to the country.
“[They’re] saying, ‘We don’t have exposure to Greece anymore—we’ve sold it all,’ ” says Braive. “But to where? Well, to the European financial stability fund—they’re the owners of the bonds now.”
Meanwhile, investors still find the corporate bond market attractive, despite the higher risk.
“There’s been a widening of corporate spreads, but not nearly what we saw last year in the summer, or a number of years ago when we had the Lehman bust,” he says.
Corporate spreads have widened from about 143 to 162 (basis points) for the corporate index, and deals have been large and in demand. Canadian Natural Resource recently did a $500 million deal, and Bell Canada had a billion-dollar-deal with 76 buyers, according to Braive.
“These spreads were a little wider than where they were a month ago, but nothing like the stress we’ve seen in the past,” he says. “There isn’t a situation where they’re going to widen more from these levels, so we would add to positions in our portfolios.”
Overall, global economic risks have increased since February, says Braive.
“We see that with what’s going on in Greece, Spain and Italy. Plus, in the U.S. we have a fiscal cliff approaching as the year ends, and something has to be done with the tax cut and expenditure side of the budget.”
He expects austerity measures by all governments to persist, and low interest rates and inflation to continue. Employment and income trends in the U.S. must improve before economic growth can occur.