Debunking bubble economies - Canada pt1

This should not be the first in a series about the Canada's bubble economy, but I didn't get the time during the past few weeks to post about the housing system there.

In one sentence, here's how Canada's socialist-style housing trust work: It's like a fully 100% guaranteed by government Fannie and Freddie. Scary? It doesn't look like so the IMF, and many other self-proclaimed financial or economist experts/advisers.

Very worth noting: Usually, foreigners are the late comers to any market and along with the retail investors, they are the ones who buy at the top and get screwed. The obvious reason is the complete lack of understanding of what they are doing.

In this report, while the Canadians are backing off these toxic assets — probably because they don't have the funding anymore, not because they know it's toxic — foreign suckers are rushing in.

Aug. 19 (Bloomberg) -- Foreigners bought a record share of Canada Housing Trust’s C$2.25 billion ($2.2 billion) bond sale, ratifying a report this week that showed international investors can’t get enough Canadian debt.

International buyers purchased 37 percent of the 3.35 percent bonds due in December 2020, according to Andrew Hainsworth, the director of debt capital markets at Bank of Montreal’s BMO Capital unit, lead coordinator of yesterday’s sale. That’s the highest ratio since Canada Housing Trust began selling 10-year bonds in November 2008.

“The international side, the outside-Canada placement, was very robust,” Hainsworth said in a phone interview from Toronto. “Canada is obviously attractive.”

Canada Housing, the financing arm of the nation’s housing agency, sold C$3.55 billion of mortgage bonds in all, including the 10-year fixed bonds and another C$1.3 billion of five-year, floating-rate debt. The 10-year bonds sold at a spread of 46 basis points over yields on benchmark government securities.

Foreign investors bought a net C$6.96 billion of Canadian bonds in June, the 18th straight month they purchased more bonds than they sold, Statistics Canada reported Aug. 17. That’s the longest since at least 1988. The last time foreigners sold more of the nation’s bonds than they bought was in December 2008.

“In just a year and a half, foreign investors have accumulated a stunning C$170 billion of Canadian portfolio securities,” Warren Lovely, a government debt strategist in Toronto at Canadian Imperial Bank of Commerce, wrote in a note yesterday. “Foreign investors have found much to like, be it stronger economic growth, a generally appreciating currency, political stability, a superior fiscal standing or unparalleled banking sector strength.”

Investors outside Canada bought C$135 billion of the nation’s bonds since 2009, four times more than the combined purchases of its stocks and money-market paper, Lovely wrote.
Canada’s annual inflation rate accelerated in July, with the consumer price index rising 1.9 percent from a year earlier, compared with 1 percent in June, according to the median estimate of 19 economists surveyed by Bloomberg News before Statistics Canada reports the data on Aug. 20.

Demand for the Canada Housing debt was helped by the fact that the bonds are “zero-risk weighted, government of Canada- backed” and that Canadian debt has lagged behind U.S. Treasuries recently, making “the relative entry point” for some international investors more attractive, BMO Capital’s Hainsworth said. Yields on 10-year Canadian government bonds have dropped 23 basis points since June, compared with a decline of 30 basis points on Treasuries.

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