Page 4
Fixed Income Quarterly—Provincial Perspectives
to our 5s-10s flattening bias, which is offside by about 4 basis points in pure spread to start the year, despite having been a decent move on a total return basis. We find it difficult to overcome the fact that the short end remains perpetually expensive, assisted by shorter-term technical anomalies, like the election call in Quebec. Accordingly, we still believe 5s-10s provies is steep and recommend selling 5s to buy 10s at a pick up of over 100 basis points. Our 5s-10s flattening bias is also supported by ongoing relatively higher funding costs for most provinces in other jurisdictions, which may induce them to tap the domestic market in the short end.
In addition, the 20-year part of the curve remains attractive, in terms of both yield and spread. This value is largely a function of selling in the 20-year part of the curve to move out further along the curve since 20-years represent the shortest holdings of the long bucket. The 20-year part of the curve is also populated with a number of higher coupon bonds that a myriad of investors do not like to own due to price.
Table 4: Provincial / Crown /SSA USD New Issue Indications
Corps vs. Provies
Given our expectation for yields to remain range-bound, we continue to favour corporates since we believe meaningful sums of new monies will be invested in the Canadian corpo- rate bond market as investors prefer to add spread. We wrote in our most recent Monthly Relative Value report about the consistent influx of funds into corporate bonds from new sources such as international investors and short-term bond funds. We expect this flow of funds into corporates to continue for the foreseeable future.
From a relative value perspective, the graphs in Appendix A indicate that corporate bonds remain attractive in the long and short parts of the curve versus provincial bonds, while the provinces look reasonably inexpensive in the middle part of the curve. We appraise relative value based on spread as a percentage of underlying yield. We note that the two new significant buyers noted above have focused their activity in the short segment of the curve and thus we expect shorter-dated corporates to forge new ground by moving relatively closer to provincials.
USD Pricing - Libor Levels
CAD Pricing - Spread to GoC Curve (bid)
Issuer DBRS Moody's S&P
USD 2-yr USD 3-yr USD 5-yr USD 7-yr USD 10-yr
CAD 2-yr CAD 3-yr CAD 5-yr CAD 7-yr CAD 10-yr
AAL AH AAA AAA AAH AH A AH AA AAA AAA
Aa1 Aa2 Aaa Aaa Aaa Aa2 Aa2 Aa1 Aa1 Aaa Aaa
AA- A+ AAA AAA AAA AA- A+ AA AA+ AAA AAA
Province of Ontario
Québec / Hydro-Québec Canada Housing Trust Export Development Canada Province of British Columbia Province of New Brunswick Province of Nova Scotia Province of Manitoba Province of Saskatchewan Canada
Alberta
+11.0bps
+17.0bps
+25.0bps
+45.0bps
+60.0bps
+25.5bps +49.0bps +69.8bps +81.0bps +27.0bps +51.5bps +74.3bps +90.0bps +16.0bps +28.0bps +41.0bps +43.0bps +16.0bps +28.0bps +41.0bps +43.0bps +18.5bps +30.5bps +53.3bps +64.5bps +26.5bps +51.0bps +72.8bps +85.0bps +25.5bps +49.0bps +69.8bps +81.0bps +22.0bps +42.0bps +63.8bps +75.0bps +18.5bps +30.5bps +53.8bps +65.0bps 0.0bps 0.0bps 0.0bps 0.0bps +19.0bps +31.0bps +53.8bps +65.5bps
+15.0bps
+22.0bps
+30.0bps
+60.0bps
+75.0bps
-6.0bps
-2.0bps
+7.0bps
+18.0bps
+20.0bps
-9.0bps
-6.0bps
+3.0bps
+15.0bps
+20.0bps
-5.0bps
+3.0bps
+7.0bps
+24.0bps
+40.0bps
+12.0bps
+17.0bps
+35.0bps
+55.0bps
+70.0bps
+10.0bps
+23.0bps
+32.0bps
+63.0bps
+80.0bps
+1.0bps
+6.0bps
+15.0bps
+30.0bps
+49.0bps
-1.0bps
+7.0bps
+15.0bps
+35.0bps
+50.0bps
-10.0bps
-7.0bps
+1.0bps
+12.0bps
+18.0bps
-5.0bps
0.0bps
+6.0bps
+25.0bps
+40.0bps
Summary
USD Arbitrage vs. CAD (all-in)
Issuer DBRS Moody's S&P
USD 2-yr USD 3-yr USD 5-yr USD 7-yr USD 10-yr
AAL
Aa1
AA-
Province of Ontario
+19.2bps +9.3bps +17.0bps +18.9bps
AH
AAA
AAA
AAH
AH
A
AH
AA
AAA
AAA
Aa2 Aaa Aaa Aaa Aa2 Aa2 Aa1 Aa1 Aaa Aaa
A+ AAA AAA AAA AA- A+ AA AA+ AAA AAA
Québec / Hydro-Québec Canada Housing Trust Export Development Canada Province of British Columbia Province of New Brunswick Province of Nova Scotia Province of Manitoba Province of Saskatchewan Canada
Alberta
+21.8bps +11.8bps +27.9bps +9.7bps +13.4bps +19.6bps +5.7bps +9.4bps +16.6bps +8.7bps +7.7bps +10.9bps +15.6bps +14.1bps +22.0bps +22.6bps +13.1bps +33.0bps +9.1bps +3.1bps +6.0bps +13.6bps +14.7bps +21.0bps +24.1bps +38.6bps +57.7bps +6.1bps +7.3bps +12.6bps
+25.3bps +18.7bps +18.7bps +14.3bps +23.5bps +37.5bps +12.5bps +23.5bps +62.7bps +14.2bps
Note: Indicative Pricing Levels As at April 2, 2014
Source: BMO Capital Markets