Canada – Becomes a Refuge in Global Investing Storm

Posted by Jonnelle Marte - Wall Street Journal

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They give us ice wine and Tim Hortons doughnuts. Now our neighbors to the north are providing something many Americans consider harder to find: a steady, conservative investment.


Tired of the turbulence in the global debt markets, American investors have been pouring into Canadian government bonds. Through October, investors bought $7 billion worth of the country’s sovereign bonds and government-backed debt, up 12% from the start of the year, to $67 billion, according to the most recent data available from fund tracker Morningstar and Ipreo, a market research firm.

All that excitement has even spurred a first: an all-Canada bond fund, launched this month by fund giant Pacific Investment Management Co.

At current rates, 10-year Canadian bonds are in line with Treasurys, at just above 2%. But fans say their allure is about more than yield in an environment where investors are fleeing European government bonds as the debt crisis drags on and some analysts are saying the United States is at risk of another credit downgrade. Given all that, Canada has emerged as one of the last true safe havens available to investors, says Ronald Deutsch, managing director of advisory firm Sage Capital Management.

Indeed, of the 15 countries that have retained their triple-A ratings by Standard & Poor’s, Canada has the fourth largest bond market behind the United Kingdom, Germany and France.

With its low inflation and modest debt, “Canada from a credit-quality perspective is the soundest ” of these top-rated countries, says Brendan Murphy, director and portfolio manager of global fixed income for Standish Asset Management Company.

Financial advisers also like Canadian government bonds for the diversification they provide against the dollar. The bonds are denominated in local currency, so if the Canadian dollar gets stronger against the greenback, the bonds end up worth more than the yields suggest, says Paul Christopher, chief international strategist for Wells Fargo Advisors.

Still, the growing popularity has already caused the payouts on Canadian bonds to shrink the 10-year bond yielded more than 3% less than a year ago, according to FactSet Research. (As bond prices rise, yields decrease.)

And the options for getting exposure to these bonds are limited. Investors who want to buy individual bonds must purchase them through their brokerage firm, which will shop around for sellers and negotiate a price; there is no equivalent of, where people can purchase Treasurys on their own. Investors typically must spend a minimum of $1,000, but experts say the bigger the purchase, the better the pricing.

For fund investors, analysts say the only pure play is the Pimco Canada Bond fund, which invests solely in government bonds.

Another strategy, says Peter Maris, a financial adviser in Wilmette, Ill., is to invest in a diversified foreign-bond fund with a sizable allocation to Canada. He likes the Loomis Sayles Global Bond fund, which has 8% of its assets in the country’s bonds.