TORONTO — The Canadian short-term debt market is undergoing a spring thaw, credit rating agency DBRS says, after “the concerted efforts of the world’s central banks and the G20 to provide liquidity and restore confidence clearly had the intended effect.”
The freeze-up of the commercial paper market in the summer of 2007 was among the first clear signs that the long debt-propelled global economic expansion was coming to grief, and now DBRS said in a study released Wednesday that the market for short-term debt securities shows signs of reviving.
“Early evidence through the first quarter of 2009 would indicate a thawing in the Canadian commercial paper market, as investors again begin to cautiously search for yield and to diversify credit exposure,” stated DBRS co-president Peter Bethlenfalvy.
This renewed appetite remains largely confined to short-term debt securities from governments, banks, and “corporations with strong fundamentals and liquidity support,” he added.
Canadian corporate short-term debt issues have increased by $1.1 billion since December, “and evidence is accumulating that current demand is outstripping supply, which may have an impact on pricing in the future,” DBRS stated.
It predicts the overall short-term market in Canada will grow by five to 10 per cent this year after increasing 11 per cent in 2008, with government notes accounting for most of the issuance in both years.
The increased short-term issues by governments “primarily reflects actions taken at the federal level to mitigate the impact of the credit crunch on Canada’s financial institutions, as well as the weakening fiscal results and higher capital requirements in certain provinces,” Bethlenfalvy observed.
The DBRS tally shows corporate commercial paper outstanding declined by 24 per cent during 2008. However, the volume of commercial paper actually swelled 13.8 per cent excluding foreign banks, investment banks and finance companies.
Short-term issues in Canada by foreign financial institutions slumped 90 per cent in 2008, Bethlenfalvy noted, “due to the global credit crunch, the significant deterioration of asset quality and the retrenchment to home markets globally.”