Loonie Flight Besieges Bonds Amid Foreign Exodus: Canada Credit

Jun 18, 2014 12:23 am ET

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June 18 (Bloomberg) -- Canadians are joining international investors in pulling money out of the country’s bonds as the flood of domestic and foreign capital that sought a haven there since the financial crisis drains away.

Individual Canadian investors have pulled C$3.1 billion ($2.85 billion) out of domestic fixed-income funds this year and put C$3.2 billion into globally-focused funds, according to data from the Investment Funds Institute of Canada. Government data this week showed foreigners sold Canadian government debt for 10 out of the past 12 months, bringing the total outflow for the period to C$31.7 billion, the biggest on record, according to Bank of Montreal’s BMO Capital Markets unit.

“People are looking for a little more yield or a little more diversification,” Kevin Gopaul, who manages C$15 billion as chief investment officer at Bank of Montreal’s BMO Global Asset Management, said during an interview in Bloomberg’s Toronto office yesterday. “The perception is growth is going to come from outside of Canada.”

Canada became the darling of investors at home and abroad in the wake of the global credit crisis as its top-rated financial system and resilient economy provided a refuge for capital. Those flows are reversing, and Canadian investors are following suit with growth in the country forecast to lag behind that elsewhere.

Fund Flows

Investors pulled C$322 million out of Canadian fixed-income funds in May, the 16th straight month of outflows, according to the IFIC data. This year’s divestments are double those for the same period last year, and the most in at least five years, the data show.

Foreign investors sold C$3.9 billion of federal government bonds in April, according to a June 16 report from Statistics Canada. That brought net divestment from government bonds to C$8.92 billion this year, a reversal of the net purchase of C$7.85 billion in the same period last year, the data show.

“If you’re a retail guy, you’re reaching for a bit more yield because you feel OK about the direction the economy is going in,” Andrew Kelvin, senior fixed-income strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto, said by phone yesterday. “If you’re really worried, you’re dumping your money into the safest thing you can get your hands on, which would be government of Canada securities.”

Falling Demand

Foreign demand for Canadian government debt has been falling since 2010, when it reached a record C$44.4 billion in purchases as Canadian growth outpaced the U.S., the euro area, Australia and New Zealand, according to Bank of Montreal and Bloomberg data.

Canada’s dollar, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, has weakened 13 percent since it reached 94.07 cents per U.S. dollar in July 2011, the strongest level in more than three years. It traded yesterday at C$1.0861.

While Canadian growth is projected to match the U.S. at 2.2 percent this year, it’s forecast to trail the following two years, according to the median estimates of Bloomberg economist surveys. The U.S. will expand at a 3 percent pace in 2015 and 2016, compared with estimates of 2.5 percent for Canada.

“We’ve got a trade deficit, we’ve got a capital account deficit, and a services deficit, so we need to attract capital,” James Dutkiewicz, fund manager and chief investment strategist at Sentry Investments Inc., said by phone from Toronto. “If domestic pools of capital begin to go abroad, that just exacerbates that problem.”

Corporate Debt

The foreign selloff in government debt in April was offset by increased investment in Canadian corporate debt, which rose by C$5.8 billion, the report showed. With Canadian equity prices reaching the highest since 2008, investors bought C$3.64 billion of the securities in April, bringing total foreign investment in Canada to the highest in a year.

“There’s less interest in Canada, but the interest that’s there has shifted toward higher-yielding assets,” Benjamin Reitzes, senior economist at BMO Capital Markets, said by phone from Toronto. “A shift into better-yielding assets, into corporates and into equities, would be an excellent explanation.”

--With assistance from Cecile Gutscher in Toronto.