Canadian Bonds and Stocks Attracting Foreign Capital

August 18, 2009

The Canadian dollar advanced 8.5% against its U.S. counterpart in the second quarter and has appreciated by a further 4.9% since mid-year.  Foreigners bought C$ 30.7 billion of Canadian fixed income securities and C$ 8.6 billion of Canadian equities last quarter.  Those net purchases surpassed C$ 4.1 billion of Canadian net buying of foreign equities in 2Q.  Canadians have been divesting U.S. bonds, with net sales of C$ 1.7 billion in 2Q, and that too reinforces upward pressure on the Canadian exchange rate.  Second-quarter net purchases of foreign stocks and bonds were 3.2 times greater than the amount bought during the first quarter, a period in which the Canadian currency lost some ground. The loonie’s bid tone this quarter suggests that Canadian securities have remained attractive.  The 10-year Canadian minus U.S. bond spread began 2009 at around a half percentage point but has hovered much closer to zero for much of this year.  The rate differential has been mostly negative since May including -9 basis points at present.  Before Canada got fiscal religion in the mid-1990’s, Canadian fixed income securities routinely offered a significant premium.  The Canadian-minus-U.S. 10-year spread averaged 134 basis points in 1991-4, for instance.  Canada’s S&P/TSX composite equity index presently shows a net advance of 40.4% since March 9.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.



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