Canadian Fixed Income: Can the Party Continue?

The past 12 months have been heady times for Canada’s fixed income markets: institutional trading volume soared in Canada while slowing in the US, investors both domestic and foreign directed new assets into Canadian bonds, and global dealers that had retreated from the Canadian market during the global crisis returned in force.

Meanwhile, Canada’s leading domestic fixed income dealers competed aggressively for talent in the hot market at home, while expanding into the US and other countries. After this exhilarating run, dealers and investors now face the question: can the boom continue?

“The past year was truly an extraordinary period that was driven by the confluence of several extraordinary factors,” said Greenwich Associates consultant Peter Kane. “But some of the factors that contributed to this boom now appear in doubt. A loss of strength in the Canadian dollar, declining commodity prices or a sputtering in the global recovery all seem real possibilities at the present moment, and any one of those developments could mean an end to the party.”

Surging Volume

Overall Canadian fixed income volume on a matched sample basis increased 42% from 2009 to 2010 – a level of growth that included a 60% increase in cash bond trading volumes. The spike in Canadian fixed income trading volume was driven by a surge in the trading of government bonds. Among a matched sample of 80 of Canada’s largest institutions, trading volume in government bonds increased 93% from 2009 to 2010 and trading volumes in provincial bonds increased 50%. Growth was also particularly impressive in Canadian mortgage bonds. Although these products make up only a small part of the overall Canadian fixed income market, institutional trading volume in mortgage bonds quadrupled from 2009 to 2010.

Return of the Global Banks

One of the biggest stories in the Canadian bond markets throughout the global crisis was the success of mid-sized firms in expanding their fixed income trading market share among Canadian institutions. The rapid gains achieved by firms such as Desjardins Securities, Casgrain and Laurentian Bank Securities from 2008 to 2009 were enabled by the retreat of many large US and global fixed income dealers forced by internal balance sheet pressures to scale back their Canadian operations. That process reversed itself last year as non-domestic dealers returned to booming Canadian fixed income markets. This return was facilitated by the renewed balance sheet strength of US and global financial service firms, the attractiveness of strong Canadian markets and a growing demand among Canadian institutions for foreign government bonds, particularly US Treasuries.

Greenwich Leaders: Canadian Fixed Income

BMO Capital Markets and RBC Capital Markets this year retain their roles as the Greenwich Share Leaders in Canadian Fixed Income Overall, with each firm capturing 16.5% – 18.5% of total Canadian fixed income volume.

RBC Capital Markets is the 2010 Greenwich Quality Leader in Canadian Fixed Income Overall, Fixed Income Sales and Fixed Income Trading, meaning that the firm received client ratings in each of these categories that topped those of competitors by a statistically significant margin. BMO Capital Markets is the 2010 Greenwich Quality Leader in Canadian Fixed Income Research, having built a near-dominant platform in institutional fixed-income research.

Among the non-domestic firms gaining market share over the past 12 months were HSBC, Deutsche Bank, Morgan Stanley, and Barclays Capital. All of these banks are targeting Canada’s largest institutions.

What Comes Next?

The primary challenge facing Canada’s major dealers and mid-sized firms in the coming year is not new competition from abroad, but rather the potential for a fixed income market slowdown right here at home. Over the past 12 months, Canada’s leading dealers have competed hard and paid aggressively for top-tier fixed income talent, while launching or continuing significant expansion efforts in the US and in Europe. Meanwhile, several mid-sized firms have made major investments in their fixed income franchises, including physical build-outs involving new or expanded offices and trading floors in Toronto.

“The sell side is increasing capacity,” said Kane, “but a variety of indicators ranging from slowing global economic growth, subsequent softening in commodities market and the gradual retreat of the Canadian dollar relative to the US currency all suggest that a slowdown in trading activity could be in store.”


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