Canadian Public Sector Borrower Roundtable

Published January 9, 2020 | 4 min read

As 2019 closed out, RBC Capital Markets brought together key issuer and investor market participants for a roundtable discussion on the challenges and opportunities in today’s Canadian public sector markets, domestic and offshore.

This year’s roundtable proved, once again, to be highly informative. Leaders in Canada’s public sector debt markets had a frank and open dialogue about the economy and Canada’s position in the global market. Participants shared their perspectives on what happened in 2019 as well as their thoughts on 2020’s forecast. Here are some of the main themes from this enlightening discussion.

Top Takeaways from the Roundtable

1. Canada’s Economy Proves Resilient Amid Slower Growth


It’s clear: 2019 witnessed slower global growth, though Canada managed to outperform. Canada’s borrowers experienced a slower-growing-economy than predicted. While a number of factors restrained growth, there were bright spots and silver linings – like significant job creation, increasing immigration and a better housing market – that showed the country’s economic resilience. These trends position Canada effectively for the future and will be needed to push the economy through expected global headwinds in 2020. A modest economic expansion is forecast for 2020.

2. Housing Market Better but Affordability Still a Challenge


The housing market bounced back to healthier activity in 2019. It was noted that delinquencies and average LTV’s have all been improving since stress tests were put in place, with average equity levels improving and arrears rates near record lows; the data is what is driving the positive narrative. This momentum should continue in 2020, supported by lower mortgages rates, solid labour markets and strong population growth. Housing affordability remains a problem, especially in Toronto and Vancouver and for the most vulnerable Canadians. The goal for Canada’s National Housing Strategy (NHS) – a 10-year, $55 billion plan – is for every Canadian to have a home they can afford by 2030.

3. Trade Disputes and Civil Unrest = Risky Business


2019 continued to see escalating trade tensions, geopolitical uncertainty and deteriorating global growth. The agreement between the US, Mexico and Canada (USMCA) was recently ratified, though there continues to be a fair bit of uncertainty on the trade front. Even bigger risks come from ongoing trade battles between the US and China. Compounding investor anxiety is political unrest in Hong Kong and potential civil instability in the US through the 2020 elections. Despite mounting global risks, the outlook is not all bleak: Canadian exporters can diversify their supply chains and capitalize on new trade opportunities.

4. The “Canada” Brand is Strong Internationally


With one of the higher yielding currencies and solid investment fundamentals, the Canada brand is popular around the world. Investors continue to see Canada as a safe haven, with international allocations increasing as a result. More Canadian issuers are issuing in Dollar and Euro markets in what has traditionally been the domain of European SSA’s, with investors comfortable with the increased exposure. Domestic investors nonetheless have some concerns about the shine coming off Canada.

5. Maple Bonds are Building Steam


It’s been a strong year for Maple bonds, with over $7 billion in issuance, compared to $5.5 billion in the previous year. These bonds are proving popular because of their strong ESG components. This upswing also reflects robust interest in the Canadian dollar market.

6. ESG Investing Continues to Swell


Increasing media attention and public concern over climate change continues to spill over into the investment space. The green bond market grew to $215 billion globally, up from $170 billion the previous year. Even though Canada holds a small portion (2%) of this market, we’ve made significant inroads this year. Ontario leads the way as the largest Canadian issuer with six green bonds. Beyond the green bond market, the issuance of broader sustainability-themed bonds aimed at addressing social and governance issues may become topical.

7. Watch for Lower Interest Rates Ahead


For over a year, the Bank of Canada has held interest rates at 1.75%. With so many of their global counterparts cutting interest rates, will its holding pattern continue? It is widely expected the Bank of Canada will ease its monetary policy and follow suit in the coming months.

8. The Impact of QE


There was general consensus on the impact global QE will have on CAD rates, though the magnitude of that impact was in dispute. Some even fear a lack of investable high-grade bonds in 2020, pointing out the impact that continued central bank asset purchase programs have had on global yields (A peak of $17 trillion of negative yielding high-grade debt). Some also pointed out that we have yet to see any meaningful rotation from equities to fixed income, which would anchor rates further should that occur. One can envision a scenario in which we have even more liquidity in fixed income markets looking for a home.

9. Changing Credit Strategies


The question is: where does that money find a home, which ties in well with some of what was discussed on credit strategies. Participants noted that the Canadian index has increased in duration from ~5.5yrs to ~8yrs over the past decade, with the quality of that index decreasing (at least by credit rating). With the curve flattening in both underlying rate and credit, clipping coupons out the curve isn’t a place some felt comfortable. Rather, increased exposure to higher grade US IG, as well as moving down the curve and boosting returns with increased torque was noted as a more likely strategy going forward. There was also broad consensus on the need to stay very liquid, which would tend to see peripheral credits trade at a larger discount.

10. Beyond LIBOR: Preparing for Benchmark Reform


Interest rate benchmark reform is a topic that also received considerable attention, particularly given the continued relative lack of liquidity in the swap market. With all FHLB banks mandated to move their liabilities to SOFR by the end of March 2020, that will be a positive liquidity event for the market. There was however concern that a lag between the elimination of LIBOR and a liquid SOFR-CDOR swap may create a market disruption as far as offshore funding is concerned for Provincial borrowers.

The full report includes a complete list of the roundtable participants, the transcript of the discussion, a comparison breakdown of Canadian federal and provincial borrower profiles and highlights of select RBC-led transactions in this space.

Read the full report

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