Fixed Income Quarterly—Provincial Perspectives
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Some investors thought the dearth of supply during March may completely offset the election news in the month, but the tepid market sentiment was likely exacerbated by the weakness in underlying long Canadas, which is readily understood to have a disproportionately negative impact on the provincial segment of the index.
Curve Appeal
Although spreads for Broad Provincials were weaker during March, not all parts of the curve were out of favour. The Short bucket of the index for most provinces received a decent bid in part as investors rolled down the curve in an effort to minimize the damage being wrought by the backup in long Canadas, as well as to position themselves ahead of the up- coming election. They were also likely bumped in further by the ongoing narrowing of Short Corporates. Yet, some modest pressure in the short end for BC and Ontario caused the ag- gregate spread for Provincials in the Short bucket to be softer by half a basis point. With the exception of PEI, the modest tightening in March failed to bring year-to-date spreads into narrowing territory as levels have yet to fully recover from early year weakness.
By comparison, the greatest spread damage during March occurred in the Mid bucket, with levels wider by 4 basis points to 5 basis points. A general paucity of longer-dated spread product has left investors reticent to sell anything in the Long bucket for fear of not being able to get it back, thus leaving Mids as the prime candidate for any efforts to shorten duration. Having said that, there was good buying in the 8-year to 9-year segment of the provincial curve towards the end of the month. Investors moved in to take advantage of recently cheapened relative value opportunities, especially since spreads in the 5-year and under part of the curve are egregiously expensive.
Table 2: Indicative Provincial Spreads
February 28, 2014 5-year 10-year 30-year
Province of British Columbia Province of Ontario Province of Quebec Province of Alberta
29 61 75 45 78 90 47 90 105 30 62 78
Average 38 73 87
March 31, 2014 5-year 10-year 30-year
Province of British Columbia Province of Ontario Province of Quebec Province of Alberta
31 66 80 50 82 94 53 93 107 32 67 81
Average 41 77 90
Month over Month Change 5-year 10-year 30-year
Province of British Columbia Province of Ontario Province of Quebec Province of Alberta
2 5 5 5 4 4 6 3 2 2 5 3
Average 3 4 3
Source: BMO Capital Markets
For example, spreads for all of the higher-rated (western) prov- inces are within a hair’s breath of CMBs in the short end, but begin to splinter away from each other as one travels further out the curve, creating more credible trading prospects.
A number of historical relationships, such as Ontario versus Quebec, have come off their recent highs due to election uncer- tainty, but remain at the low end of the recent range. Investors are also less willing to add to positions in the western provinces since they appear expensive to Ontario.
The bias toward shorter duration in March caused a 2-basis- point bear steepening of the 5s-10s curve, while 10s-30s backed up by half a basis point. This move obviously runs counter
Table 3: FTSE TMX Canada Provincial Bond Index Total Return and Spread
Source: PC Bonds, a business unit of the TMX Group Inc., BMO Capital Markets
Short
Mid
Long
Broad
Sector
Return
Spread (bps)
Return
Spread (bps)
Return
Spread (bps)
Return
Spread (bps)
MoM
YTD
MoM
YTD
MoM
YTD
MoM
YTD
MoM
YTD
MoM
YTD
MoM
YTD
MoM
YTD
Provincials
-0.07%
1.14%
0.56
1.12
-0.39%
2.97%
2.74
5.14
-0.72%
4.76%
3.32
1.48
-0.48%
3.42%
2.92
3.59
Alberta
British Columbia Manitoba
New Brunswick Newfoundland
Nova Scotia
Ontario
Prince Edward Island Quebec Saskatchewan
-0.05% -0.22% -0.06% -0.05% -0.02% 0.00% -0.06% 0.10% -0.08% -0.05%
1.03% 1.78% 1.11% 0.94% 0.79% 0.47% 1.13% 0.49% 1.19% 0.70%
-0.35 0.47 -0.37 -0.33 -0.59 -0.38 1.59 -2.90 -0.34 4.13
1.71 0.82 0.39 0.11 1.66 4.67 0.29 -4.15 2.36 4.85
-0.47% -0.46% -0.41% -0.42% -0.40% -0.47% -0.41% -0.34% -0.32% -0.36%
3.11% 2.87% 2.89% 2.72% 2.55% 2.49% 3.06% 2.56% 2.92% 2.60%
3.59 5.02 3.19 3.02 2.07 3.57 2.72 2.38 1.55 2.05
5.00 7.29 5.13 5.72 4.29 6.42 3.81 3.80 5.92 4.61
-0.90% -0.87% -0.76% -0.83% -0.81% -0.90% -0.73% -0.85% -0.59% -0.83%
4.77% 4.69% 4.87% 4.73% 4.33% 5.20% 4.85% 4.95% 4.62% 4.72%
3.03 4.42 3.58 4.52 4.61 3.80 3.42 3.91 2.57 4.07
1.25 2.34 0.89 1.56 2.67 1.38 0.33 0.82 3.28 1.79
-0.44% -0.65% -0.51% -0.55% -0.72% -0.74% -0.48% -0.72% -0.39% -0.73%
2.70% 3.75% 3.40% 3.24% 3.90% 4.12% 3.45% 4.33% 3.29% 4.10%
2.80 3.25 2.68 2.95 3.94 3.50 3.88 3.29 1.52 2.12
3.97 3.22 2.94 5.26 2.91 5.53 2.94 1.33 4.71 1.68