CAN/US Corporate Spreads : What Is Going On?
Trading & Investing
Let’s take a look at the CAN/US corporate spread differential volatility that we have been seeing recently.
Here are a few thoughts.
Canadian US Corporate spreads differential is at historical wides.
CAN/US relative liquidity premium has not materially changed in the last 10 years, Canadian equities are flying relatively high, so why are we seeing this just now? If it was relative liquidity driven, we should have seen this in the last crises that I experienced as an institutional investor (1998, 2001, 2008, 2020).
Here are two possible explanations:
1. It’s a massive opportunity… buy.
2. There are structural differences in housing markets and in the relative banking industry weights between our economies and this could be explanatory in the current macroeconomic context.
More details on the thesis: We have no taxation buffer in Canada like there is in the US (mortgage payments are not tax deductible) and a much shorter mortgage horizon.
We will be seeing the impact of the BOC and FED rate hikes on discretionary spending in the next 6-12 months. Moreover, they should be significant in both countries. Furthermore, because of retail leverage structure and the mortgage industry structure they could hit harder in Canada.
In addition, our Canadian economy being smaller and our banking sector being more important as a proportion of total corporate issuance in Canada with NVCC and bail ins, this might keep wider spreads and cause more corporate hardship through secondary effects in Canada than the US.
This 35bps differential might be an opportunity, it could also be a warning.
This said, in conclusion, I’m certain the Bank of Canada is paying attention to the situation.
Written by Pierre-Philippe Ste-Marie
Bilingual senior finance executive with twenty-five years of experience and an exceptional track record as a portfolio manager and investment team leader. Skilled in designing and implementing relevant business strategies. In addition, executing the required changes. Furthermore, I am an expert in investments, and I have strong analytical, decision-making and organizational skills. An excellent communicator, recognized for my effective leadership. And lastly, my practical management style and a high degree of professionalism.
Visiting Researcher : Bodhi Research Group
CAN/US Corporate Spreads : What Is Going On?
