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Fixed Income Quarterly—Provincial Perspectives
We have maintained our preference for corporate bonds over provincial bonds all year as we believe investors will prefer to add spread in a range-bound yield environment. The stronger performance of corporate bonds in January and March as yields backed up within their recent range underscores this investment thesis. Moreover, we believe yields may be under some pressure over the near term. Provincial issuers are com- ing back to the market following budget-related blackouts and investors await material coupon and maturity payments in June to reinvest in the market and rekindle yields. At the same time, we observe geopolitical risk is currently heightened in Europe and may place a serious bid behind fixed income should tensions escalate further. In such an event, we expect provies to outperform corporates.
While weakness in underlying Canadas was the main driver behind the total return underperformance of Broad Provincials during March, elevated political uncertainty in the form of an election call in Quebec weighed on spreads. All provinces traded heavier once the election announcement was made in early March, as would be expected whenever the prospect of a possible change in the political status quo emerges. After some initial softness, traditional buyers moved in to look for some relative value and also engage in the usual month-end buying
Table 1: Provincial Borrowing Calendar
and rebalancing action. This purchasing activity curtailed some of the early damage and, as a result, spreads for Broad Provincials widened by just 3 basis points by the end of March, with little difference in performance among all of the provinces. The reduction in volatility once news of the election settled-in caused spreads to quiet down a bit heading into April.
The modest gapping in March brought spreads for all the provinces into negative territory for the year. Of note, several of the eastern provinces (i.e. New Brunswick, Nova Scotia and Quebec) are leading the charge softer, moving out by roughly 5 basis points so far in 2014. Nevertheless, there is not too much difference between the various provinces in terms of their spread movements.
The fact that a number of provinces were in issuance blackouts related to the tabling of their budgets helped limit the spread damage during March since the amount of primary market supply from the provinces was restricted to just $2.7 billion. Supply in the month was also curbed by the fact that Provincial issuance in the year started so strong with $10.4 billion worth of deals in January as many provinces moved quick out the gate to secure funding ahead of their budgets.
2014/15 (C$ Millions) Budget Balance
2015/16 Budget Balance
Estimated Re-financings
Net New Borrowing
Total
Non-market/
Completed(6) Domestic International
Remaining Borrowing to
31-Mar-15 % Funded
British Columbia Alberta(7) Saskatchewan Manitoba Ontario Québec (1)
184 206 2,476 2,699 1,087 941 1,814 6,559
108 (218) (7,200)
New Brunswick (3) (391) (262) 756 1,017 1,773 -23 0 Nova Scotia (4) 0 0 594 -39 346 0 P.E.I. (35) 1 100 100 200 0 0 Nfld & Labrador (5) (538) 29 575 425 1,000 0 0
Prov'l Totals (10,499) (4,754) 48,599 33,381 81,980 7,400 0
105 (357) (10,100) (454)
884 2,764 22,000 12,258
628 2,003 15,000 7,368
5,175 0 0 8,373 250 0 1,512 191 0
5,175 0% 8,123 3% 1,321 13% 4,766 0% 34,248 7% 15,741 20% 2,000 0% 1,796 -1%
210 62%
200 0% 1,000 0%
74,580 9%
4,766 37,000 19,626
0 0 2,753 0 3,885 0
1,642
Hydro-Québec(2) n/a n/a 4,379 -2,379 2,000 0 0
Notes:
1. Requirements include Financement Québec. Completed includes FY13/14 pre-funding
2. 2014 calendar year
3. Includes guaranteed NB Electric (0), NBMFC ($150 million), and remaining $23 million of 13-14 requirements 4. Includes NSMFC
5. Includes Newfoundland & Labrador Hydro
6. CAD equivalent
7. Change in net assets
As at April 2, 2014
Source: BMO Capital Markets