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Fixed Income Quarterly—Outlook
Spreads Marching to Their Own Drummer
After one of the slowest starts in several years, the corporate new issue market in Canada stepped it up a notch during March, posting the second busiest deal volume on record for that month, at $9.9 billion. March 2014 represented the most active month so far this year, and returned the primary market to monthly levels more consistent with those in 2013. However, the rise in primary market action during March 2014 should be taken with a grain of salt when determining whether ongoing monthly new issuance trends have finally ratcheted back up to year-ago levels.
To begin, the pace of deals in January and February this year was reasonably slow versus the previous few years in part due to the periodic interference of exogenous risk (e.g., geopolitical, economic and financial). As a result, a building number of new issues were progressively delayed into March, especially from February, which likely distorted the total transaction volume for last month to the upside. When examined on an average monthly basis, for example, there was roughly $6.8 billion brought to market in Q1/14. That figure is reasonably soft compared with the $8 billion, $7.4 billion, and $9.6 billion of average monthly issuance during the first quarter of 2013, 2012 and 2011, respectively. While the chasm of average monthly Q1 activity between 2014 and the previous several years does not in and of itself seem exceedingly monumental, there were other factors percolating beneath the surface that suggested a permanent return to the $8.8 billion of average monthly issuance in 2013 may be some time in coming.
At the top of the list is a building tension between investors and issuers that simmered with growing ferocity as the weeks passed by to begin 2014. It did not take issuers long to real- ize that the relative paucity of deals in January and February was shifting the balance of pricing power in their favour. They were well aware of the considerable bounty of investor cash that remained on the sidelines and needed to be put to work, a fact that was no doubt pounded into their psyche by an incessant stream of investment banker calls about copious reverse inquiries. The minute amount of issuance, coupled with a strong purchasing of deposit notes and tightening spreads in December 2013, also pointed to the fact that investors were poised to kick off 2014 with a buying frenzy. When the pace of the primary market was fairly inert to start the year and spreads tightened further, investment bankers scrambled to convince issuers that the time was ripe to hit up investors for cash.
Chart 1: 5-Year Canadian Corporate Indicative Spreads 700
AA A BBB
600 500 400 300 200 100
0
Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
Source: BMO Capital Markets
Chart 2: 10-Year Canadian Corporate Indicative Spreads
700 600 500 400 300 200 100
AA A BBB
0
Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
Source: BMO Capital Markets
Chart 3: 30-Year Canadian Corporate Indicative Spreads
700 600 500 400 300 200 100
AA A BBB
0
Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13
Source: BMO Capital Markets
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