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Fixed Income Quarterly—Outlook
spread and term were also ensured. That strategy was driven by the reverse inquiry process, and saw a plethora of investors either tripping over themselves or relenting to issuer demands in order to simply obtain investable product.
Furthermore, the dearth of transactions from traditional financial issuers meant greater receptivity for lower-rated and infrequent issuers. Issuance from the Big 6 Banks is down almost $4.4 billion so far this year to $8.5 billion, while ABS is lower by $1.3 billion and Other Financials reduced by $1.7 billion to $2.4 billion. This pronounced decline in transaction volumes, combined with ongoing intrinsic demand for corpo- rates, paved the way for issuance from sectors such as REITS (which has transacted $1.6 billion year to date).
Much of the demand exhibited by the troika of international investors, short-term bond funds and asset swappers resides largely in the realm of financials given their trade size require- ments (i.e., $20+ million). With spreads from the financial sectors being bid to recent multi-year lows, more traditional
Chart 7: 2-Year Q1/14 Spread Changes
investors were forced down the credit quality spectrum in order to find spread and any semblance of relative value. However, since almost all sectors are now at multi-year lows for spreads, the incentive of late has been more just to add spread (dis- regarding relative value) and to find any product at all. This process has been distorted by reluctance from investors to sell bonds since they are finding it hard to get them back, and by very thin inventory positions held at the dealer level, leading to more and more agency trading.
Still, investors who are not benchmarked, such as asset liabil- ity matchers, are endeavouring to be more disciplined in the current frenzied market, holding out for price and looking to hold credit in the form of provincial bonds and agencies. This strategy, which is underpinned by the luxury of being able to take a longer-term view, is not conducive to the current reali- ties of the corporate market for most other investors, who are constantly being directly judged based on performance. As a consequence, most investors are feeling compelled to source
Chart 8: 5-Year Q1/14 Spread Changes
5-Year Q1/14 Spread Changes
-19 Retail -16 Telecom
-15 Real Estate Banks - Sub Oil and Gas
-10
-8 -7
-7 -7
-7
-2
Infrastructure Pipelines
Utilities
Banks - Senior
Life Insurers - Senior
0 -5 -10 -15 -20 -25
2-Year Q1/14 Spread Changes
-19 Real Estate -18 Banks - Sub
-18 Retail Telecom
Oil and Gas Pipelines Infrastructure Banks - Senior Utilities
Life Insurers - Senior
-9 -8
-6 -5
4
- -4
-1
0 -5 -10 -15 -20 -25
Source: BMO Capital Markets
Chart 9: 10-Year Q1/14 Spread Changes
Source: BMO Capital Markets
Chart 10: 30-Year Q1/14 Spread Changes
10-Year Q1/14 Spread Changes
-28 Real Estate Retail
-23
-18
Telecom
Oil and Gas
Utilities Infrastructure
Life Insurers - Senior Pipelines
Banks - Senior Banks - Sub
-13
-8 -7
-6 -5
-4 -4
0 -5 -10 -15 -20 -25 -30
30-Year Q1/14 Spread Changes
-35 Retail -16 Telecom
-15 Life Insurers - Senior -10 Infrastructure
-10 Utilities
-9 Pipelines 0 -5 -10 -15 -20 -25 -30 -35 -40
Source: BMO Capital Markets
Source: BMO Capital Markets