Canadian Foreign Property Rule Change To Benefit US Bond Market

A report from Greenwich Associates on its 2005 Canadian Fixed Income Study and its special study on the impact of the elimination of the 30% Foreign Property Rule showed that the US bond market will benefit the most from the rule change.  

Other key findings from the studies, according to a Greenwich Associates press release, include:

• Canadian institutions’ plan to increase their holdings of foreign bonds from the current 3% of total assets under management to 5% if the 30% Foreign Property Rule is removed.
• Over the 12-month period ending in March 2005, cash bond trading volume declined 15% while fixed-income assets under management at Canadian institutions increased 17%.
• While the proportion of Canadian institutions trading fixed income electronically was stable year-to-year at about 30%, the proportion of investors planning to start e-trading is on the decline.
• More than 25% of Canadian institutions expect to add to their foreign investments within six months of the proposed elimination of the Foreign Property Rule, and another 30% said they would do so within a year of the change.

While US bonds will be the biggest beneficiaries of the investment shift, almost 40% of survey respondents say they plan to increase their use of European investment-grade corporate bonds, more than 30% plan to use more US Agencies, and more than 25% expect to use more European government debt, the release said.

However, while the rule change is expected to create a good shift for foreign markets, Greenwich Associates’ Senior Managing Director Woody Canaday cautions against unrealistically high expectations pointing out that,“In particular, one potential factor that seems to be mitigating a substantial build-up of foreign fixed-income assets: Canadian pension plan liabilities are in Canadian dollars while foreign bonds are denominated in foreign currencies.”

A copy of the report can be purchased  here .