What happened with credit spreads and new issues this week? Find out here

  • Jason Ellis, Senior Vice President and Managing Director, Capital Markets


I’m running behind today, so no pithy introduction.  On the plus side, my failure today is just a chance to do better next week. 

Economic Update

In up to the minute news, Statistics Canada indicated that Canada’s economy grew by a greater than expected 0.2% in July.  Analysts had predicted a 0.1% growth rate.  The data may be enough to cement market expectations of another rate increase on October 24th.  Implied probability of a 25 basis point increase currently stands at around 90%.

Since we’re on the topic of central banks and rate hikes, The Federal Open Market Committee (“FOMC”), increased the Federal Funds target rate by 25 basis points on Wednesday.  Very much expected.  It was the fourth hike in the last 12 months and seventh in the last twenty four.  In contrast, the Bank of Canada has only hiked four times in the last 2 years.  The Fed next meets on October 8th

Looking ahead to next week, US and Canadian employment data is released on Friday.

New Issues and Credit Spreads

This week featured the first ever ‘bail-in’ deposit note issuance.  If you’re not up to speed, Canada’s “Bail-in” Regime will allow authorities to quickly convert some of a failing bank’s debt into common shares in order to recapitalize the bank and help restore it to viability.  The new structure is part of a global response to the financial crisis of 2008 and applies to Canada’s domestic systemically important banks (“DSIBs”).

RBC issued $2 billion 5 year Bail-In Senior Unsecured Notes priced at GoC+95.  The issue was oversubscribed and pricing tightened to the full extent of guidance.  Over 70 investors confirmed their love for bank debt despite the new regime.

For context, legacy ‘non bail-in’ deposit notes were trading in the range of +80-82 at the time of issuance, suggesting a 13-15 basis point premium over legacy notes.  However, in anticipation of future scarcity, legacy deposit notes rallied as much 5-6 basis points in recent weeks so one might argue the ‘normalized’ spread premium was closer to 8-10 basis points.  However you measure it, the premium ends up being much less than the market was originally expecting.  The banks win again. 

In other domestic issuance this week, the Province of Ontario (AA low) priced $1 billion of its June 2028 bonds at GoC+67.  By comparison, the AAA rated 10 year CMB trades around GoC+40.

In the ‘generic index’ space, the IG31 (an US investment grade index of equally weighted credit default swaps) is at 60.  For context, the twelve month high is 68.9 and the twelve month low is 45.2.  For clarity, lower is better.

Rates and Curves

I have one word for you. Inverted…barely.  Ok…two words.  At the moment, the 2 year GoC benchmark yields, 2.206%, the 5 year GoC benchmark yields 2.329%, the 10 year GoC benchmark yields 2.413% and the 30 year GoC benchmark yields…wait for it…2.408%.  If you look closely, that’s a tiny little inversion between the 10 and 30 year bonds.  Anomaly or harbinger of the apocalypse?  Don’t ask me.  I just work here.

The Weekend

I’ll leave you here.  I’ve got some real work to do.  Apparently it takes more than Unicorn Toast to be the ‘Host with the Most’ these days.  If I’m going to have people over this weekend, it looks like I’ll need at least a pair of Nigerian dwarf goats.   According to the news, the hip thing coming out of LA is to get down on all fours and let the goats jump on your back.  You have ‘goat’ to be kidding me. 

It’s official.  I’ve run out of material. 

Have a great weekend,

Treasury Guy.