Canada. Cross-border portfolio investment result in sizeable inflows of funds

Cross-border portfolio investment resulted in sizeable inflows of funds to Canada in August. Non-residents invested further in Canadian securities...

adding $5.1 billion to their portfolios. Foreign investment in August was spread among all asset classes, except government short-term debt securities.

Meanwhile, Canadian investors adjusted their portfolios of foreign securities, moving from foreign debt to foreign stocks for a net reduction of $112 million.

Non-residents continue to favour Canadian bonds over money market instruments

The trend of foreign acquisitions of Canadian bonds in 2009 carried into August, with non-residents acquiring an additional $4.5 billion worth of these instruments. Federal government and its enterprises' bonds accounted for nearly all of this activity in August.

Bonds have an original term to maturity of more than one year.

Money market instruments have an original term to maturity of one year or less.

Government of Canada paper includes treasury bills and US-dollar Canada bills.

Non-residents picked up $2.8 billion of federal bonds over the month. Foreign acquisitions were focused on the five-year benchmark bond, partially offset by divestment in the two-year benchmark bond. In August, yields on the five-year benchmark bond were largely unchanged while those on other federal government benchmark bonds dropped considerably.

While the overall supply of federal bonds expanded further, three-quarters of the foreign investment in Canadian bonds was comprised of acquisitions on secondary markets. New issues by the private corporate and provincial government sectors slowed significantly from recent strong borrowing activity.

Meanwhile, foreign investors removed a further $1.1 billion from their holdings of Canadian money market instruments in August, after July's divestment of $3.8 billion. Divestment in August again focused on federal government short-term paper, as retirements remained high. However, non-residents invested in corporate short-term securities, mainly bank issues.

Foreign investment in Canadian stocks sustained since February 2009

Non-residents purchased $1.7 billion of Canadian equities in August, as Canadian stock prices (+0.8%) continued to trend up in August. This was the seventh straight month of foreign investment in Canadian shares. Equities of Canadian banks and financial firms again attracted the bulk of the foreign investment over the month. These two sectors were among the top performers on the Canadian stock market, posting year-to-date gains of 51% and 37% respectively.

Canadians continue to divest US government debt securities
Canadians continued to reduce their holdings of foreign bonds in August. They sold $2.7 billion worth, nearly all US government bonds, and focused on the US Government two-year benchmark bond. Since September 2007, the US government two-year benchmark bond has posted lower yields than its Canadian counterpart.

At the short-term end of the spectrum, Canadians disposed of $111 million worth of foreign money market instruments in August. Divestment was concentrated in the US government sector, as residents sold $263 million of US Treasury bills. However, paper issued by European banks drew the largest Canadian investment since the turbulence on credit markets became apparent in the summer of 2007. Nevertheless, in August, Canadian holdings of foreign paper fell to their lowest level in 2009, as the Canadian dollar appreciated against all its major trading counterparts.

Strong investment in foreign equities

Canadians bought a further $2.7 billion of foreign stocks in August, as major global equity markets posted gains. This investment was fuelled by strong demand from the Canadian mutual and pension fund sectors. Nearly 60% of the purchases in August were non-US foreign stocks. Since August 2007, Canadian investors have rebalanced their portfolios of foreign securities, adding $37.7 billion of foreign stocks and removing $43.0 billion of foreign debt instruments.

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