Canadian banks issue flurry of bonds as stagflation fears mount

Bloomberg

Canadian banks have already raised more cash in bond markets than in the whole of 2021 as jitters about the global economy and conditions in the financial markets run high.
With almost seven months to go in 2022, Canadian bank sales of corporate bonds in the domestic and international markets are close to C$168 billion dollars ($133.6 billion) so far this year. That’s more than the C$153 billion raised last year and C$155 billion in 2018, the previous record, according to data compiled by Bloomberg.
The Bank of Canada raised interest rates by 50 basis points for a second straight time as it pushed ahead with monetary tightening and warned that it may act “more forcefully” if needed to tackle inflation that is running at the highest in three decades. That’s even as senior managers at Goldman Sachs Group Inc. and JPMorgan Chase Co. are warning of tougher times ahead amid a string of shocks rattling the global economy.
National Bank of Canada priced in the US dollar market $750 million of senior bail-in bonds, notes that are eligible for the banks’ total loss-absorbing capacity, or TLAC. Larger rival Toronto-Dominion Bank raised $5.5 billion of the same type of securities the day before as companies bring issuance forward in order to get ahead of rising funding costs.
On top of senior bail-in securities, banks are also selling covered bonds and deposit notes, instruments that can’t be included in the loss-absorbing buffers but help optimize market funding costs. Royal Bank of Canada priced $1.6 billion of 3.4% covered bonds maturing in three years at par, data compiled by Bloomberg show. A similar-duration senior bail-in bond issued by Canada’s largest bank by assets is quoted at a yield of around 3.54%.
Also Laurentian Bank priced C$400 million of 3-year deposit notes at a spread of 173 basis points over Canadian government bonds, according to people with knowledge of the transaction. The Montreal-based lender, which on Wednesday released better than expected earnings, priced a similar transaction in December at a spread of 92 basis points.
“With costs of funding rising and market volatility impacting the new issue windows, access to funding and maintaining liquidity becomes increasingly important,” said Ryan Goulding, a fixed-income manager at Leith Wheeler Investment Counsel in Vancouver.
Precautionary reasons aside, banks expect corporate borrowing to continue at a strong pace, some of the country’s largest lenders said last week. That could be in part because in an inflationary environment with a scarcity of labour, productivity becomes very important, Desjardins’ Berbiche said.
“We are most likely seeing emerging demand from the commercial sector — which comprises medium and large companies — which could offset the expected slowdown in the real estate sector,” he said. “In which case, these needs will result in pressure on the liquidity of financial institutions.”