"All things considered, Canada's bond market looks to be coping with geopolitical uncertainty (and non-trivial net bond supply)," said National Bank in an overnight note.
National Bank noted some $2.25 trillion of Canadian bonds changed hands in March, "far and away a new monthly record". The prior high water mark was $2.01 trillion set in October 24. The bank said with budget deficits and large scale capital needs driving the stock of domestic bonds higher, secondary volumes should be biased higher. All the same, it added, March's volume surge was "striking", a 9% monthly increase in seasonally adjusted terms and 24% higher year on year.
In the Government of Canada (GoC) bond market, where over 80% of trade happens, market-makers "no doubt felt pressure for stretches, as headline noise presumably had clients moving in the same direction", said National Bank. "But credit the dealer community for providing ample liquidity, as evidenced by the near 60% year over year increase in GoC bond volumes with domestic clients."
National noted with international hedge funds increasingly active in GoCs, non-resident attitudes bear close scrutiny. "But non-resident flows appeared relatively orderly (and hardly
unidirectional) from our vantage point. A bit of a test passed then."
Conditions in Canada's credit markets haven't significantly "soured", or at least not yet, National Bank said. Excluding GoCs, it noted, executed bond volume rose 6% month over month in March to stand at about 15% higher year over year. "That's a slower advance than for the sovereign, but the federals are growing their debt stock faster after all," it added.
As with Canadas, National Bank noted dealers facilitated incremental volume with all major client types -- be they domestic or international. Now, it also noted, one aspect consistent with elevated volatility is the apparent moderation in secondary volumes as you move out of the credit spectrum. "In other words, lower risk (or lower beta) government spread product saw relatively healthier turnover in March, while corporate bond volumes were more sedate. But all things considered, the bank dubbed this a relatively well-functioning (and reasonably liquid) domestic bond market...which is a comfort given that political risk could continue to flare."