Investors rush to lock in yields as companies accelerate debt sales ahead of central bank rate cuts
The Canadian high-yield debt market is experiencing growth as companies increase debt sales and investors seek to lock in coupons before central banks ease monetary policies, according to BNN Bloomberg.
Companies have raised around $4.7bn through non-investment-grade debt sales so far this year. This represents the second-fastest pace of issuance since at least 2017, based on data from National Bank of Canada and Bloomberg.
The rising interest in high-yield debt is driven by investors seeking higher returns as the Bank of Canada continues on a path of interest rate cuts, with the Federal Reserve likely to follow.
A notable shift occurred when Videotron, a major issuer of Canadian junk bonds, was upgraded to investment-grade status in May. Videotron, a division of Quebecor Media, had more than $3bn of outstanding bonds before the upgrade.
The company’s move to investment grade left its bondholders searching for alternatives, creating opportunities for other issuers.
Canada’s junk bond market remains relatively small, about 1.5 percent of the size of the US market, but this has not deterred activity.
Rob Brown, co-head of debt capital markets at Royal Bank of Canada, noted that junk bond issuers are accelerating funding plans, refinancing existing debt, and extending maturity profiles. Funding costs for these firms are at their lowest since 2022.
The inverted yield curve, where short-term debt is more expensive than long-term, has also motivated companies to shift short-term bank debt into the high-yield market.
National Bank Financial’s Sean St. John highlighted that high-yield coupons have compressed to the point where they compete with bank loan pricing, making it more attractive for firms to issue longer-term debt.
From an investor perspective, enthusiasm for high-yield debt stems from the expectation that interest rates have peaked, with the Bank of Canada having already cut rates three times since June, now sitting at 4.25 percent. This provides an opportunity to lock in yields before further rate cuts.
The relatively small size of the Canadian junk bond market presents advantages for companies like ATS Corp., which opted to sell Canadian dollar-denominated debt in August rather than a larger US dollar deal. The average Canadian dollar tranche size this year is $311m, significantly smaller than in the US.
St. John pointed out that fund flows into fixed income have been robust, increasing demand for new high-yield issues. He added that investor receptivity has been strong, with liquidity in the secondary market at its highest levels.
