Risk of negative interest rates low: Scotiabank
The Bank of Canada’s measures to ease strains in short-term borrowing markets are starting to work.
The Canadian Dollar Offered Rate, a measure of companies’ short-term debt funding costs, has declined by about a quarter over the last two business days, according to data from Refinitiv, the administrator of the index.
That’s a signal of a thaw in credit markets. The benchmark is based on pricing information for bankers’ acceptances supplied by the six largest Canadian banks.
Any sign that financial markets are functioning better now is good news because more central bank power may be needed to offset the impacts of a deep recession and a collapse in oil prices, according to AllianceBernstein.
Western Canadian Select crude has plunged to just $4.03 a barrel. “So we have indications of severe downturn in Canada,” said Yves Paquette, a Montreal-based portfolio manager at AllianceBernstein. “Small and large businesses need liquidity so markets can function properly.”
The Bank of Canada cut its policy rate Friday to 0.25 per cent, the lowest since 2009, and said it would start buying a minimum of $5 billion a week in government securities. It also announced plans to buy short-term corporate paper. Earlier it unveiled measures to purchase of provincial debt and mortgage bonds.
Governor Stephen Poloz said Friday the commercial paper market, which companies use to meet short-term cash needs, was effectively frozen. He added that the Bank of Canada’s balance sheet had increased by $90 billion over the previous two weeks as it bought up assets.
To be sure, the gap between Cdor and the central bank’s benchmark rate is still wider than average. The three-month Cdor was at 1.235 per cent on Monday. It would have to approach levels around 0.65 per cent to have “some type of normality,” said Max D’Alessandro, a fixed income portfolio manager at Professionals’ Financial Inc. in Montreal, which manages $1.6 billion of assets.
Still, “the cut on Friday and the new commercial paper program seem to have brought some much-needed breathing room to the market,” he said.
The central bank bought $20 billion of bankers’ acceptances at an weighted average yield of 1.15 per cent on Monday, down from a yield of 1.57 per cent on March 23, when it carried out the first reverse auction of such assets.
The Bank of Canada has also widened the range of collateral it accepts in its term repo operations, which provide banks with liquidity for as long as one year, and has bought at least $439 million of short-term provincial debt so far.
Similar measures by the Federal Reserve and other central banks have helped loosen credit globally. That has led to improvement in Canadian provincial and corporate bond markets, where risk spreads tightened Monday after hitting the widest levels since 2009, according to Bloomberg Barclays indexes.
Provinces led by Ontario took advantage of the better market tone Monday to advance their funding plans. The world’s largest sub-sovereign bond issuer raised $1.8 billion in five-year debt in the largest transaction in Canadian dollars from a province so far this year, according to Bloomberg data. Ontario issued at a spread of 96.5 basis points over federal government debt.
“Certainly the Bank of Canada’s actions last week have helped to loosen conditions,” said Patrick O’Toole, a senior portfolio manager for global fixed income at CIBC Asset Management.
“But we’re not out of the woods yet. Liquidity can dry up anytime, and should the stock market retest prior lows -- at it generally does several times during bear markets -- we could see conditions deteriorate again.”
In the corporate bond market, Enbridge Gas raised $1.2 billion by selling 10- and 30-year bonds. The order books were covered 5.5 times and 5 times respectively, according to people familiar with deal arrangers communications to investors. A $1.5 billion issue on Friday by wireless provider Rogers Communications Inc. was 3.5 times oversubscribed.
“Investor demand has emerged, allowing a number of debt issuers to tap the market. That’s been an important vote of confidence, said Warren Lovely, head of fixed income, currencies and commodities strategy at National Bank Financial Markets.“So while it’s encouraging to see issuers get some funding in the door, there will be no shortage of supply to digest and more competition from the Government of Canada than we’ve ever seen.”