Amazon.com Inc.'s record-breaking bond sale in Canadian dollars has sent ripples through the Canadian fixed income market, forcing fund managers to sell high-quality bonds to accommodate the influx of debt. The $14 billion offering is the largest corporate bond ever raised in Canadian dollars, surpassing Alphabet Inc.'s $8.5 billion deal last month.
Market Impact and Investor Response
The five-part Amazon bond has pushed risk spreads higher and prompted other borrowers to delay their own note sales. According to Chris Whelan, head of tactical trading strategy of fixed income at TD Securities, the deal has sapped buying capacity for upcoming offerings. “Each deal will feel a bit heavier for the next month,” Whelan said, adding that borrowers are likely to hold off on big sales for “a good while.”
Etienne Bordeleau, a portfolio manager at Ninepoint Partners LP, noted that Amazon's deal, which includes a $4.75 billion 30-year portion, is comparable to the Canadian government's typical 30-year bond auctions of $3 billion. It is “no surprise” that such a large transaction would “distort the Canadian bond market,” he said, pointing to Canada's long-dated sovereign bonds “massively” underperforming comparable U.S. Treasuries on Monday.
Shifts in Investment Portfolios
To make room for the Amazon debt, investors have sold high-grade credits, including longer-dated securities from utilities and bonds from Alphabet, which tapped the loonie market just last month, said Dhruv Mallick, head of credit at Leith Wheeler Investment Counsel Ltd. Despite these adjustments, the market is absorbing the deal relatively well. Investment-grade Canadian corporate bond spreads widened by about two basis points on Tuesday, a mild move that suggests stability.
At 84.5 basis points above the government curve, these spreads remain more than 30% tighter than the five-year average. Strong inflows into Canadian fixed income have supported these narrow margins, allowing the market to fund increasingly larger transactions, according to Randall Malcolm, senior managing director of fixed income at SLC Management. “This has made more global corporate issuers consider Canadian dollars as a potential funding source,” he said.
Future Outlook for Hyperscaler Debt
So-called hyperscalers, including Amazon and Alphabet, have been tapping credit markets globally to raise cash for massive artificial intelligence initiatives, expanding their investor base by borrowing in currencies like the loonie and euro. Canadian investors now expect more hyperscaler debt, which could eventually develop a liquid technology credit sector that the country has lacked, according to Mallick. “Canada is open for business,” Bordeleau said.
