Foreign purchase of Canadian bonds hits all-time high

Statistics Canada says foreign investment in Canadian securities totalled $24.0 billion in July, led by a record acquisition of Canadian bonds.

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The total for the month reversed the sale of $858 million in Canadian securities by foreign investors in June.

Statistics Canada says non-resident investment in Canadian bonds totalled $23.8 billion in July, boosted by new issues of private corporate bonds in foreign markets ($11.4 billion). Nearly half of these new bonds were issued by Canadian banks.

Foreign investors also bought $8.0 billion of federal government bonds and $2.9 billion of provincial government bonds.

Canadian long-term interest rates were up by 35 basis points in July. The Bank of Canada raised its benchmark overnight interest rate by 25 basis points in July, the first increase since 2010. Meanwhile, the Canadian dollar appreciated against its U.S. counterpart by three U.S. cents.

So far in 2017, “[U.S.] dollar bulls have had a rough ride,” says Andrew Grantham, CIBC senior economist, and Royce Mendes, CIBC director, in a weekly economics report. But the dollar’s depreciation in the year has been softened by Asian central bank purchases, as those banks look to combat the dollar’s weakness by increasing their foreign reserve accumulations.

“The intervention shows how significant a headwind currency strength is to exports in those countries,” says the report. “It also supports our view that further U.S. dollar depreciation against Asian currencies will be gradual, especially if a Fed rate hike occurs before year-end.”

Non-resident investors sold $1.5 billion in Canadian money market instruments. “Foreign acquisitions of corporate paper were more than offset by a divestment in government paper,” says StatsCan. “Canadian short-term interest rates increased by eight basis points in July.”

Foreign investment in Canadian equities amounted to $1.6 billion in July.

“Issuance of new Canadian shares to non-resident portfolio investors, resulting from cross-border mergers and acquisitions, led the activity during the month,” says StatsCan, and further notes that Canadian stock prices edged down in July.

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Canadian investors reduce foreign equities

Meanwhile, Canadian investors sold $1.8 billion in foreign securities in July as they reduced their holdings in foreign equities by $2.9 billion in July — both in U.S. and non-U.S. foreign shares.

Nevertheless, Canadian investors have acquired $31.3 billion in foreign equities in 2017, in contrast to a divestment of $243 million over the same period in 2016. U.S. stock prices were up by 1.9% in the month and 10.4% since December 2016.

Canadians acquired $1.1 billion in foreign debt securities in July, mainly U.S. Treasurys. U.S. long-term interest rates were up by 13 basis points, while short-term rates were up by 9 basis points in the month.

Net result of investment

Overall, Canada’s international transactions in securities generated a net inflow of funds into the Canadian economy of $25.8 billion in July.

Foreign investment in Canadian securities has exceeded Canadian investment in foreign securities by $86.2 billion since the beginning of 2017, led by foreign acquisitions of Canadian private corporate instruments.

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