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Fixed Income Quarterly—Monthly Money Trail
International Fund Flows
Rude Reception
Debt Securities received a rather rude salutation from inter- national investors to start 2014, incurring net redemptions of $1.8 billion. Much of the selling took place in the area of government money market instruments; however, it is likely some of those monies were directed toward agency bonds, which experienced net purchases of $2.3 billion in January.
Another interesting occurrence was a second month in a row of net selling by international investors for bonds issued by private corporations. As noted in our last report, corporate bonds had a tremendous year in 2013, with net purchases rising by $12.4 billion to just over $32 billion. This activity tailed off in the last month of the year as international investors divested a net position of $1.6 billion in corporates. At that time we asserted that such selling activity was part of any healthy market and thus did not express any concern.
We are similarly not worried about the net divestiture of $2.7 billion to start 2014, which matches up well with the $2.2 bil- lion that was invested in money market instruments issued by private corporations. With new issuance activity beginning 2014 at a rather tepid pace, there was little product sloshing around in the secondary market for international investors to purchase. We have observed previously that much of the buying activity from international investors is restricted to
Table 2: Canada’s International Transactions in Securities
shorter-dated bank paper in the secondary market, as well as shorter-dated bonds from cross-border issuers like Wells Fargo and GE Canada. In this regard, a number of traditional do- mestic buyers of corporates had purchased bank deposit notes heading into year-end 2013, using such investments as a quasi- cash position to be divested once the new issue market opened up at the start of 2013. However, since new issuance activity was slow to surface, the amount of deposit notes available in the secondary market was constricted, tightening spreads and leaving few bonds available for purchase, especially in the larger sizes that international buyers usually prefer to acquire. Compounding matters, the domestic banks were themselves slow out the gate for issuance, meaning fewer bonds were made available for trade in the secondary, exacerbated by an increasing number of investors that had to turn to the second- ary market to satisfy their deposit note demand.
On the bright side, the fact that international investors ploughed in over $2 billion to money market instruments issued by private corporations suggests that money will even- tually be making its way back into the domestic corporate bond market. Our trading desk has indicated that demand from international investors for corporate bonds remains quite strong, and that buying activity has been higher than normal. For much of 2013 we witnessed international investors selling government bonds and buying corporate bonds. We believe this trend will continue over the near term, but recognize that
(C$ millions) November 2013 December 2013 January 2014 2012 2013
Foreign Investment in Canadian Securities 9,081 -4,283 1,086 83,207 42,800
Debt securities
Money market instruments
Governments
Federal government
Other governments Corporations
Government business enterprises
Private corporations Bonds
Governments
Federal government
Other governments Corporations
Government business enterprises
Private corporations Equity and investment fund shares
3,854 -7,128 -4,038 -1,179 -2,859 -3,089 -1,373 -1,716 10,982
3,051 2,535 517 7,930 4,010 3,921 5,227
-6,592 4,322 2,620
-2,146 4,767 1,702
269 1,432 -10,914 -7,976 -6,554 -1,422 -2,938 -1,311 -1,627 2,309
-1,750 -1,420 -3,549 -1,739 -1,810
2,129 -79 2,207 -330 80 134 -54 -410 2,319 -2,728 2,836
82,235 13,255 3,478 456 3,023 9,776 368 9,404 68,981 46,527 32,885 13,646 22,455 2,789 19,665 968
23,903 -2,521 -6,901
-10,015 3,115 4,380 272 4,107 26,423 -10,270 -7,160 -3,105 36,690 4,635 32,058 18,897
Canadian investment in foreign securities
7,171 3,876 2,338 35,140 27,519
Debt securities
Money market instruments Bonds
Equity and investment fund shares
7,016 3,417 751 -482 287 -742 7,498 3,130 1,494 155 459 1,587
11,933 -1,616 13,548 23,206
23,009 1,586 21,423 4,511
Source: Statistics Canada. Table 376-0131 – International transactions in securities, portfolio transactions in Canadian and foreign securities, by type of instrument and issuer, monthly (dollars). BMO Capital Markets