After a relatively quiet April, foreign investment in Canadian securities surged in May with non-residents purchasing $1.7 billion worth. Investment for the month occurred entirely in debt securities as foreign investors reduced their holdings of Canadian shares.

Meanwhile, Canadians continued to increase their holdings of foreign securities but by only $305 million, substantially less than in the previous three months. Canadians invested in foreign bonds and stocks but sold off some of their holdings of foreign money market paper.

Chart 1
Foreign portfolio investment in Canadian securities

Investment in Canadian debt instruments surges

After a number of months of lacklustre activity in the sector, foreign investment in Canadian bonds surged in May with non-residents purchasing $2.6 billion worth. Most sectors experienced an increase in holdings with purchases of corporate ($2.1 billion) and provincial government issues ($1.4 billion) leading the way. However, foreign investors continued to reduce their holdings of federal government bonds for a fourth consecutive month, selling off $950 million. Over the last six months, non-residents have sold off $6.9 billion of federal government bonds.

Foreign investment in Canadian bonds was driven completely by net new issues (new issues less retirements) totalling $3.0 billion for the month, the largest amount since May 2004. Net new issues consisted entirely of corporate and provincial government debt with nearly all issues being placed in the US market and denominated in US dollars.

Meanwhile, foreign investors purchased $1.1 billion in Canadian money market paper in May after purchasing $285 million in April. The bulk of the investment occurred in federal treasury bills as non-resident investors picked up $1.2 billion worth, the largest investment in that sector since December 2001. Other than corporate, all other sectors experienced a decline in foreign holdings.

Chart 2
Foreign portfolio investment in Canadian bonds

Foreign investors reduce their holdings of Canadian equities

Chart 3
Foreign portfolio investment in Canadian stocks by type of transaction

For the first time in almost a year, foreign investors sold off some of their holdings of Canadian equities in May. Sales of $2.1 billion worth occurred entirely in outstanding issues as there was little in the way of new issues or activity related to acquisitions during the month. Foreign sales of Canadian outstanding shares in May reached their highest level since July 2002. It also marked the third consecutive month that non-resident investors have divested some of their holdings, wiping out all net foreign investment in the secondary market since the beginning of the year.

Overall, American investors did most of the selling in May as they sold off $1.3 billion worth, their largest divestment in Canadian equities in 12 months. They were followed by investors out of the United Kingdom, who sold $672 million of Canadian stocks.

Canadians continue to invest in foreign securities but at a reduced pace

While Canadians continued to invest in foreign securities, it was at a much reduced pace from previous months, as they purchased only $305 million in foreign securities in May. This compares to an average of $4.3 billion purchased from February to April.

Chart 4
Canadian portfolio investment in foreign securities¹

Canadian investors took a break in their acquisition of foreign bonds and invested just $139 million in May, their smallest investment in the sector since August of last year. They divested some of their holdings of US treasuries but increased their holdings of US corporate and other foreign issues. They also purchased $703 million worth of foreign stocks consisting entirely of US shares ($1.6 billion) but selling $927 million of overseas equities. Meanwhile, Canadians divested some $537 million of foreign money market paper. They sold US government and corporate paper but continued to purchase overseas paper.