Analysis – May 2008
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Foreign demand for Canadian securities remained strong in May as investment in new Canadian bonds accelerated. This activity was mainly comprised of long-term debt instruments issued by the provincial and private corporate sectors.
At the same time, Canadian investors continued to diversify their investment by adding a sizable amount of foreign securities to their portfolios, favouring equities over long-term debt instruments. May also saw the second monthly investment in foreign short-term debt since August 2007.
Large foreign acquisitions of Canadian bonds fuelled by newissues
Non-residents purchased $7.7 billion worth of Canadian bonds in May, the largest monthly acquisition in over a year. The focus remained on new issues denominated in foreign currencies by Canadian private corporations and provinces, with $6.8 billion (net of retirements) of these bonds picked up.
Related market information
Canadian short-term interest rates were essentially unchanged in May at 2.68%. Meanwhile, US short-term rates increased a substantial 44 basis points to 1.73%. Nevertheless, Canadian short-term rates exceeded US rates by 95 basis points.
In May, long-term interest rates in both Canada and the United States moved upwards, with Canadian rates increasing 10 basis points to 3.68% and US rates going up 26 basis points to 4.03%. The resulting differential widened to 0.35%, in favour of investment in the United States.
Canadian stock prices increased by 5.6% in May with the Standard and Poor's / Toronto Stock Exchange Composite index ending the month at a record of 14,714.7. Solid gains were widespread across sectors. US stock prices, as measured by the Standard and Poor's composite index, were up 1.1% to 1,400.4 at the end of May. So far in 2008, the Canadian stock market has been the only major world market which posted a gain. The Canadian market increased 6.4% over the first five months of the year, in contrast with a 4.6% drop in US stock prices over the same period.
The Canadian dollar rose by 1.42 US cents in May to close at 100.70 US cents.
Definitions
The data series on international security transactions cover portfolio transactions in stocks, bonds and money market instruments for both Canadian and foreign issues.
Stocks include common and preferred equities, as well as warrants.
Debt securities include bonds and money market instruments.
Bonds have an original term to maturity of more than one year.
Money market instruments have an original term to maturity of one year or less. Government of Canada paper includes treasury bills and US-dollar Canada bills.
Non-residents also added smaller amounts of outstanding Canadian bonds and money market instruments to their portfolios in May. Purchases of bonds on the secondary market were up moderately ($490 million), half of which were in the federal government securities. However, foreign investors disposed of federal government enterprise bonds for the first time in nine months. The increase in foreign holdings of Canadian short-term debt instruments ($478 million) was largely concentrated in provincial securities.
Foreign demand for Canadian shares continues
Non-residents acquired a further $2.5 billion of Canadian shares in May, for a fourth straight month of equity investment. Close to two-thirds of this activity was in secondary markets, with shares of technology, mining and energy firms drawing most of the foreign inflows.
The Standard and Poor's / Toronto Stock Exchange composite index has been the only major world stock market in 2008 to post a year-to-date gain, driven by high commodity and energy prices.
Canadian investment in non-US foreign stocks reaches a 13-monthhigh
Canadian investors' demand for foreign stocks remained strong in May, with a sizeable $5.1 billion outflow. Total foreign equity purchases have amounted to $15.8 billion since February 2008. In May, Canadians gave preference to non-US stocks ($4.4 billion), with a focus on banking and energy shares.
Canadians return to foreign money markets, pass on foreignbonds
Canadian investors bought foreign money market paper in May ($1.2 billion), making it the second monthly investment since the meltdown of the asset-backed finance sector in August 2007. One-half of May's acquisition went into US Treasury bills, as short-term interest rates in the United States rose sharply (+44 basis points), following a string of declines since July 2007.
There was a nominal $187 million divestment of foreign bonds in May. Despite an increase in yields, holdings of US government bonds were little changed. This followed large fluctuations in investment flows over the past few months. Meanwhile, Canadians continued to divest in maple bonds in May. Since January 2008, Canadians disposed of $1.8 billion worth of these bonds compared with a $19.9 billion acquisition for the same period in 2007.
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