Investors bold enough to stick a toe back into the Canadian high-yield bond market are reaping their rewards.
Returns on the nation’s speculative-grade debt this year are topping those of all of its Group of Seven developed-nation peers, and are headed for their best quarter since 2009. Leading the way are the bonds of Jupiter Resources Inc., Teck Resources Ltd. and Calfrac Well Services Ltd., all of which were pricing for imminent default earlier this year.
The rally follows the worst year for Canada’s junk since the financial crisis, as investors finally see an end in sight to a slump that drove oil — Canada’s biggest export until last year — to more than a 12-year low. Confidence is also fueled by the Canadian government’s delivering on a promise of fiscal stimulus in its March 22 budget, the European Central Bank’s expanded bond-buying program, and positive economic data out of the U.S.
“People were just buying credit in general because they got a little bit optimistic about all of these things that were going on,” Mark Wisniewski, a credit hedge-fund manager for Sprott Asset Management LP, said by phone from Toronto. “Where we go from here is anybody’s guess. We’re not out of the woods yet.”
The big hit Canadian bonds took in 2015 is a key reason for their outperformance this year, according to David Tulk, chief Canada macro strategist at Toronto-Dominion Bank. The Bank of America Merrill Lynch U.S. High Yield Canadian Issuers Index’s first-quarter gain of 6.9 percent covers barely half of the index’s 11.7 percent loss in 2015.
And it’s some of the most beaten-down bonds that have been the top performers. Jupiter Resources’s 2022 bond has jumped to 52.75 cents on the dollar from its January low of 32 cents, Teck’s 2023 bond has gained to 67.75 cents from 43.5 cents, and Calfrac’s 2020 bond has appreciated to 48.5 cents from 36.8 cents. Bombardier Inc., struggling with delays and cost overruns on a new jet, had the best returns — 6.7 percent — among the top 50 issuers on the Global High Yield Index.
“The market was probably too stretched in terms of pricing in a lot of weakness through the end of the year,” Tulk said by phone from Toronto.
Sprott’s Wisniewski, who holds Canadian high-yield debt including energy, said current bond prices are probably now reflecting a fairer valuation relative to the price of commodities.
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“We’ve had a healthy move in spreads and prices,” he said. “Now there’s going to be a pause.”
The Canadian high-yield market has remained closed this year as investors and companies fail to come to an agreement on new issuance pricing. Corus Entertainment Inc. pulled a C$300 million ($229 million) junk-bond offering due to “unfavorable market conditions” after investors demanded a minimum yield of 9 percent.
Whether the first-quarter revival turns into a sustained rally, or simply represents a “dead-cat bounce,” depends in large part on the price of oil. After jumping 58 percent from a February low of $26.21 a barrel in New York, crude has slumped below $39 again on concerns of a supply glut. And U.S. Federal Reserve Chair Janet Yellen said on March 29 the global economy still presents heightened risks.
“I don’t think on any front you’ll see the same kind of rate of appreciation or improvement in data or financial markets in the second quarter as you did in the first quarter,” Toronto-Dominion’s Tulk said.
But it’s not totally bleak at home looking ahead to the second quarter. Canadian manufacturing is showing signs of a pick-up and the government’s planned fiscal stimulus will provide “a little bit more of a cushion under the Canadian economy,” Tulk said.
“That sets Canada apart as well from some of the other countries that don’t have that fiscal lever,” he said.
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