Domestic primary slows; 'selective' maple deals forecast after IBM sale; bank notes rally

By Cristal Cody

Prospect News, Feb. 7 - The Canadian bond markets stayed positive with a good tone on Tuesday despite a lack of issuance while offerings in the United States ticked up.

"I was expecting a little more issuance this week, and it just hasn't materialized yet," a source said.

The Canadian markets on Tuesday were "pretty quiet compared to last week," another source said. "We're having a slow couple of days recently. The market tone continues to be very positive with spreads tightening in and holding in."

In the U.S. investment-grade market on Tuesday, Canada sold $3 billion of 0.875% five-year global notes.

Domestically, corporate earnings season is "holding some issuance" back, a source said. "Everything is very attractive in terms of underlying rates and investor demand. Last week, the big transactions went really well."

On Friday, International Business Machines Corp. (Aa3/A+A+) brought the first maple bond deal this year.

IBM sold C$500 million of 2.2% five-year notes in the Canadian investment-grade market.

"It's the first corporate maple since mid-2011," a source said.

This time last year, the Canadian markets saw C$1 billion of maple bonds sold in four deals year to date, according to data compiled by Prospect News.

The maple bond market is expected to stay active in 2012, "but it will be very, very selective," one bond source said. "Australian banks may have the ability to come back to the market and companies like IBM."

Bank paper strengthens

Bank paper has firmed in the Canadian secondary market, trading at least 15 basis points better over the past two weeks, sources said.

"There's a very strong bid at the moment - either an allocation into fixed income or some of the larger accounts may have been hanging on to their cash and have decided in the last few days to start buying investment-grade corporates," a bond source said. "Not so much insurance companies yet."

In trading, "bank deposit notes have rallied 25 basis points from their recent highs in the course of a week or two," another source said. "Everything is holding in."

Canadian deposit notes with a 2016 maturity traded in the area of 108 bps to 110 bps two weeks ago.

"Today, they're in the area of high 90s to 100," the source said.

IBM's maple bonds traded about 5 bps better, a source said.

Also in trading, Canada's new U.S. dollar-denominated bonds firmed 3 bps going out, a trader said.

Investment-grade bonds overall were mostly unchanged on Tuesday. The Markit CDX Series 17 North American investment-grade index was flat at a spread of 95 bps.

Canadian government bonds fell over the day, pushing yields up 2 bps to 6 bps across the curve. The 10-year note yield rose 6 bps to 2.03%. The 30-year bond yield closed up 5 bps to 2.62%.

Canada prices $3 billion

Canada sold $3 billion of 0.875% five-year global notes on Tuesday to yield Treasuries plus 8 bps, a market source said.

The deal size was pegged at between $2 billion and $3 billion prior to the sale. A source said they were priced tighter than talk in the "low double digits" over Treasuries.

The notes (Aaa/AAA/AAA) were priced at 99.937 to yield 0.888%. They are non-callable.

Bookrunners were Bank of America Merrill Lynch, Deutsche Bank Securities Inc., HSBC Securities (USA) Inc. and RBC Capital Markets LLC.

BMO Capital Markets, CIBC World Markets Corp., National Bank Financial Inc., Scotia Capital USA Inc. and TD Securities USA LLC were the senior co-managers.

Co-managers were Casgrain & Co. USA Ltd., Desjardins Securities Inc. and Laurentian Bank Securities Inc.

Proceeds will be added to Canada's official foreign exchange reserves.

Canada last priced U.S. dollar-denominated bonds in a $3 billion deal of 2.375% five-year notes priced at Treasuries plus 23.5 bps on Sept. 2, 2009.

In the secondary market, the notes firmed to 5 bps bid, 1 bps offered, a trader said.

IBM firms

IBM's 2.2% notes due 2017 traded about 5 bps tighter on Tuesday, a bond source said.

The maple bonds due Feb. 10, 2017 priced at a spread of 85.5 bps over the Government of Canada benchmark on Feb. 3.

"Very good performance given where it came," the source said.

The technology products and services provider is based in Armonk, N.Y.

Andrea Heisinger contributed to this review

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