Analysis – February 2010

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Non-residents added a further $6.7 billion to their holdings of Canadian securities in February, all in Canadian bonds. Meanwhile, Canadian investors acquired $3.9 billion of foreign debt and equity securities in February, the largest outflow since March 2009, following significant divestments in January.

Strong foreign investment in Canadian bonds continues

Non-residents acquired a further $7.8 billion of Canadian bonds in February, though at a slower pace than in January. Secondary market purchases of federal government bonds accounted for half of the inflow, with the remainder almost equally split between new provincial bond issues and outstanding private corporate bonds. Canadian mortgage bonds again attracted sizeable amounts of foreign funds in February.

Since January 2009, non-residents have added Canadian bonds to their portfolios for 14 straight months, with acquisitions totalling $100.7 billion. These inflows of funds from abroad over this period mainly reflected new issues activity of Canadian corporations and provinces, as well as secondary market purchases of federal government bonds. Notably, foreign holdings of federal government bonds nearly doubled during the 14-month period.

Foreign investors reduced their holdings of Canadian money market instruments in February by $855 million, with about half of the divestment in provincial government paper. Non-residents returned to trimming their holdings of federal government paper, down $315 million in February, as the market for federal government Treasury bills continued to shrink for a fifth consecutive month.

Foreign divestment of Canadian equities slows

Non-residents continued to divest Canadian shares in February, but by small amounts. Sales of energy and information technology shares over the month were partially offset by acquisitions of a diversified portfolio composed of the largest Canadian firms by market capitalisation. In February, the S&P/TSX60 large cap index advanced the most among all indexes by market capitalisation and outperformed its US counterpart.

Canadian investors buy US government debt instruments

Canadians resumed purchases of foreign bonds in February, adding $1.8 billion to their portfolios. Overall, two-thirds of this investment was in US government bonds, focussed on the seven-year benchmark bond. The remainder was comprised of purchases of both US corporate bonds and non-US bonds, the latter as a result of increased activity in the maple bond market. In February, US long-term interest rates increased to 3.7%, 75 basis points higher than in February 2009.

Canadian investors also acquired $749 million of foreign money market instruments in February, adding to January's investment. US government Treasury bills accounted for nearly all the outflow for both months. Since January, US short-term interest rates strengthened from their low levels.

Canadians buy non-US foreign stocks

Canadians added $1.4 billion to their holdings of foreign stocks in February, the largest such investment since August 2009. Acquisitions were focussed on non-US foreign stocks with a $1.5 billion outflow, after five months of divestment in these instruments. At the same time, Canadian investors made small adjustments to their US holdings. They sold US equities in energy, financial and banking sectors while adding equities in the consumer product industry. In February, US equity prices rose 2.9%, led by the financial companies.