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Normandin Beaudry

Maple bonds

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There, in black and white

Bulletin NB Vol. 9 N. 6, June 2006

A taste for maple...

The Canadian bond market has been evolving since the removal of the foreign content limit stated in the federal budget in early 2005. Maple bonds were a key element in this transformation. Named after the Canadian flag, Maple bonds are Canadian dollar-denominated bonds issued by foreign issuers. Issuers may be governments, corporations (primarily banks), sovereign issuers or supranational organizations.

The popularity of the Canadian bond market with foreign issuers has been on the rise since 2002 and soared last year. In 2005, more than $20 billion in new issues of Maple bonds entered the market. The trend appears to be continuing with over $6 billion in bonds issued for the first quarter of 2006, which exceeds the total issued for all of 2002.

The large majority of issuers are concentrated in Europe, particularly in Germany and the United Kingdom, with approximately 60% of Maple bond issues. American issuers account for close to 30% of bond issues and Australia and Asia share the remaining 10%.

There are several reasons behind this enthusiasm over the Canadian bond market. The primary reason is Canadian investors’ increasing demand for this type of product. The Canadian market is saturated with corporate bonds issued by the five largest banks. The diversification that ensues from Maple bonds is therefore very welcome. A decade of decrease in the number of federal bonds issues caused by the improvement in Canadian public finances has also prompted the appearance of other issuers.

Another reason is the favourable yield environment. The yield for a 10-year Canadian federal bond is approximately 60 basis points lower than its American counterpart, making Canada an attractive market to U.S. issuers. The low number of corporate bonds issued in Canada also resulted in significantly narrower credit spreads than those from other markets. The introduction of foreign issuers could widen these spreads and thereby increase volatility, which would create more active bond management opportunities.

For the foreign issuer, the Canadian bond market represents a new territory to explore. For the Canadian investor, Maple bonds represent a diversification opportunity with a higher yield for an equivalent credit rating.

Although Maple bonds are not currently included in the Canadian bond index, should the trend continue, they will have an impact on the market. Scotia Capital introduced an index dedicated to Maple bonds on April 3, 2006.

Investors who wish to add Maple bonds in their portfolio must take into account the liquidity risk and the manager expertise in terms of foreign credit analysis. They must also make sure that the statement of investment policy for the pension or investment fund allows for the addition of this asset class.

 

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