Finance. Canadian Investors Reduce their Holdings of Foreign Debt

Canadian investors began to reduce their holdings of foreign debt securities, especially short-term instruments, in August of 2007 at the outset of global credit concerns. Overall, about $17 billion was shed in the second half of 2007, over 70% in short-term paper.

In 2008, this activity extended into longer-term debt, mainly US Treasury bonds. As a result, an additional $22 billion of foreign debt was removed during the year.

Divestment in the fourth quarter of 2008 was particularly pronounced as substantial amounts of foreign equities were sold in addition to bonds during October, when global stock markets declined sharply. Some of the proceeds of the liquidation of foreign securities were likely placed in Canadian short-term instruments, in line with a significant increase in the supply of Treasury bills in the quarter.

Canadian investors continued to repatriate funds in December, with significantly reduced holdings of foreign debt instruments. Foreign equities were also sold, as Canadian investors shed $6.4 billion of foreign securities over the month. This was the fourth month of divestment in foreign securities. In stark contrast to 20 consecutive years of significant portfolio investment abroad, Canadian investors reduced their holdings of foreign securities in 2008, returning funds to the Canadian economy.

Meanwhile, non-residents reduced their portfolios of Canadian securities in December to the tune of $2.8 billion, removing an unprecedented amount of bonds from their holdings. However, they continued to significantly adjust their portfolios in favour of Canadian short-term instruments for a second month.

Canadian investors continue to scale back holdings
of foreign debt instruments

Canadians continued to shy away from foreign money market instruments in December, reducing their holdings by a further $1.7 billion, equally split between US Treasury bills and corporate paper. In December, US short-term interest rates remained just 3 basis points above zero, an all-time low. Moreover, residents sold $3.8 billion of foreign bonds in December, mostly US Treasury bonds.

The year 2008 marked the first annual divestment ($16.4 billion) in foreign bonds since 1994, with the reduction of US government bonds alone accounting for three-quarters of this activity. The US dollar rose a full 23% against the Canadian dollar in 2008, while Canadian rates gained ground over US rates in the second half of the year, making Canadian bonds relatively more attractive than their US counterparts. The collapse of the maple bond market, which was very strong from 2005 through to the first half of 2007, also dampened Canadian investment in foreign bonds.

Canadian sales of non-US foreign equities continue

Canadian investors sold $961 million of foreign equities in December, ending the fourth quarter with the first divestment in nearly six years. Canadian holdings of foreign equities were further reduced in the quarter by significant losses as global stock markets slumped.

December's divestment was in non-US equities, mainly shares in European energy and financial sectors. However, transactions in US stocks were flat in December, as US share prices remained relatively stable.

Foreign demand for Canadian securities remains focused on short-term debt instruments

Non-residents disposed of a record $8.5 billion of Canadian bonds in December. Three-quarters of December's reduction was due to retirements, split between federal government debt and the corporate debt, mainly federal government enterprises and private corporations. December's activity followed substantial divestment in November.

This activity resulted in the largest quarterly reduction in non-resident holdings of Canadian bonds since the third quarter of 2003. However, annual investment flows in bonds were up from 2007, as foreign purchases of Government of Canada bonds on secondary markets were the highest in six years.

Non-resident investors did however acquire an unprecedented $4.9 billion of Canadian short-term paper in December, following strong purchases in November. For both months, investment was concentrated on the most liquid Government of Canada money market instruments; however, substantial paper issues in December by federal enterprises and provinces, with relatively attractive yields, also led to considerable foreign inflows. Transactions in the fourth quarter of 2008 accounted for the bulk of foreign investment in Canadian money market instruments for 2008.

Foreign investors make moderate acquisitions of Canadian equities in December

Non-residents acquired a moderate $715 million of Canadian corporate shares in December, as Canadian stock prices were relatively stable. Acquisitions were spread across a wide variety of sectors.

Overall, Canadian stock prices retreated 35% in 2008, the largest annual decline since 1931. This translated into moderate net sales for this instrument on secondary markets for the year.

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