Overseas Bond Sellers Kick Tires in Canada Mortgage Plan Shadow

A state-owned German bank tapped loonie bond investors, potentially encouraging other top-rated issuers to follow suit just as Prime Minister Justin Trudeau’s government mulls canceling Canada’s mortgage bond program.

(Bloomberg) — A state-owned German bank tapped loonie bond investors, potentially encouraging other top-rated issuers to follow suit just as Prime Minister Justin Trudeau’s government mulls canceling Canada’s mortgage bond program. 

Germany’s L-Bank sold C$300 million of AAA-rated bonds in its first widely marketed Canadian dollar deal. Other supranational and international government-related issuers, known as SSAs, are also weighing debt sales, according to Sven Lautenschlaeger, international funding officer at the lender. 

The bank decided to go ahead with the transaction after investors said they want to see more highly rated international issuers in the so-called maple bond market, given the uncertain future of Canada’s C$260 billion ($192.3 billion) mortgage bond program, Lautenschlaeger said.

“I’ve already received questions from other issuers and they are also monitoring the market,” Lautenschlaeger said in an interview. “We’ll try over time to be a more regular issuer” in Canadian dollars.

Canada mortgage bonds, known as CMBs, are priced with extra yield over federal government debt, even though they are guaranteed by Ottawa and rated AAA. Trudeau’s government is deciding whether to wind down that operation by merging it into its main borrowing program in an effort to reduce costs. 

But the proposal has come under fire from market participants, who have argued that it might have unintended consequences. They warn that money that would otherwise flow into CMBs may end up going elsewhere rather than into Canadian government debt, driving up yields for government and corporate borrowers. The country’s finance department recently finished a consultation on the plan. 

Read More: Mortgage-Bond Shakeup Risks Backfiring on Trudeau, Investors Say

After the L-Bank transaction, Canadian-dollar denominated bonds issued by supranational and international government-related issuers have reached over C$7.2 billion so far this year, up from almost C$6.2 billion for all of 2022, according to data compiled by Bloomberg. 

L-Bank is short for Landeskreditbank Baden-Wuerttemberg Foerderbank.  

L-Bank’s bonds are guaranteed by German state of Baden—Wuerttemberg, and garner top investment grades by Moody’s Investors Service and Fitch Ratings and one level lower by S&P. Its three-year bond offering was priced on Aug. 17 to yield 4.868%. The Karlsruhe, Germany-based institution’s 4.85% notes were quoted Tuesday at a spread of around 42 basis points over the Canada government yield curve compared with around 22 basis points for a similar-maturity Canada mortgage bond, according to Bloomberg indicative bid prices.

Royal Bank of Canada, Bank of Montreal and Toronto-Dominion Bank, which arranged the L-Bank transaction, also collectively put in orders totaling C$62 million, Lautenschlaeger said. Central banks and official institutions took 44% of the transaction, while banks took the remaining 56%. Investors in Europe, the Middle East and Africa bought 52%, while 48% was purchased by Canadian investors, he said.

“We are very pleased about the outcome and about the strong support from on the one hand from our loyal investors and on the other hand for the strong support from our three leads,” said Lautenschlaeger. “When you come for the first time to the market, it’s always a challenge, and it has definitely been a challenge to get it done.” 

Highly rated securities in Canadian dollars benefit from international demand from reserve managers such as central banks, which at the end of first quarter had $270.75 billion of assets denominated in loonies, according to International Monetary Fund data. Around 40% of the CMB program is placed with international investors, according to a letter sent to the government by the Investment Industry Association of Canada. 

“The attractiveness of Government of Canada offerings to both foreign and domestic investors is evidenced by the depth of the Canadian market and investors’ confidence in Canada’s financial ecosystem,” an official with the Canadian finance department said by email.  

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