ARCHIE W. BLUE August 15 1923


ARCHIE W. BLUE August 15 1923




THE Dominion government has completed one of the most important pieces of financing seen in this market in several years in the sale of $22,500,000 of Canadian National Railway 15-year, 5 per cent. guaranteed serial bonds to a large and representative syndicate of Canadian investment houses and banks. Canadian investors have become pretty well seasoned to large scale financing on government account through our war experiences, and therefore the figure involved in the present instance may not seem impressive. The fact should not be overlooked, however, that this is the first occasion on which the government has borrowed on railway account in this market, former issues having been sold in New York; and, furthermore, the present offering represents the most important transaction ever negotiated with Canadian bond houses by public tender. At the accepted price of 97.887 the government is borrowing at an approximate cost of 5.35 per cent., a rate that may be regarded as eminently satisfactory in view of the unsettled conditions prevailing in security markets generally at the present time.

Aside from the fact that it is Lully guaranteed both as to interest and principal by the Dominion of Canada, and it affords Canadian investors the privilege of securing an exceptionally well-secured bond at a satisfactory rate, the issue presents one or two aspects of peculiar interest. It is a large morsel for the domestic market to digest at this particular time; large even for rapid consumption in New York under the present order of things. The financial world has followed carefully its reception at the hands of Canadian investors. The government, as is well known, has other and more important borrowing to complete this year. The Victory bond issue of 1923 maturity falls due this fall, and approximates something like $180,000,000. In addition the government has certain indebtedness with the banks variously estimated from $50,000,000 up. Monies with which to satisfy the banks, and refund the maturing Victory loan issue, must be raised before the year is out, and the present offering of equipment bonds, will, it is anticipated, thoroughly try out the domestic market, and test its fitness to cope with larger issues pending. As the issue has ’ been quickly over-subscribed it appears probable that a large part of the autumn funding operations of the government can be taken care of at horne. The Minister of Finance may deem it advisable, notwithstanding, to approach the New York market, or even London, if exchange conditions have righted sufficiently to permit of such an operation.

No Forced Bond Liquidation

THE Canadian gilt-edged market has displayed commendable firmness throughout the year, even in the face of varying and often reactionary Endendes in New York. The two markets have faced a diverse set of economic conditions, each of which has left its pec liar impress upon the curve of values. In Canada business has improved on a moderately conservative scale, and there has been no forced liquidation of bonds to raise funds for commercial and industrial purposes. The generally accepted economic doctrine holds that bond values appreciate when business is dull, and decline when business is on the upgrade or is particularly active. - The United States, as is common know'edge, has experienced an almost unprecedented boom, in all lines of activity, and

by a natural course of events bond values have slumped off from the peaks. The decline in New York on the whole has been rather drastic in range, and has carried values to a point where there has been even a slight margin of advantage in favor of the Canadian market.

It will be recalled that throughout 1920-21 and 1922 the New York market was relatively higher than the Canadian. Added to this was the fact that New York funds were at varying rates of premium over the Canadian dollar. A situation was created whereby it was much more profitable for Canadian provinces, and the larger municipalities to arrange their borrowing across the border where they could secure the advantage of the higher prices prevailing, and the premium too when their funds were reconverted into Canadian currency. This advantage has disappeared, however, within the year, and latterly large as well as the smaller financing operations have been arranged at home, except in cases where funds had to be raised for the refunding of bonds maturing in the New York market.

Whether this market can maintain the present advantage in view of the heavy government financing in prospect remains to be seen. Conservative opinion rather inclines to the belief that there may be a temporary shading of values in the autumn months, although it is generally admitted that the market is in a major upswing, which should continue, with minor interruptions of course, for some years, or until such time as governments or municipalities are able to borrow within sight of a four per cent, or even a three and a half per cent. rate. There have been important revisions downward in the cost of financing in the past two years, and governments which in 1920 were required to pay six and six and a half per cent, for new money can now borrow at a rate somewhat under a five and a half per cent, cost basis.

Bond prices have moved forward in a series of stages, for the public has been diffident in accepting as final the newer and lower interest levels that have appeared from time to time. Two years ago practically every new issue that came out bore a six per cent, coupon rate, and the majority of offerings were marketed at a discount. Later, however, the price gradually crept up, and as dealers avoid offering premium bonds as far as possible owing to a distaste on the part of the public in paying more than par, and the slower movement of securities that such a situation entails, there was an adjustment of the coupon rate in 1921 and 1922 to the five and a half per cent', rate. In a few isolated instances, chiefly among western municipalities which have to pay higher rates for their money, the six per cent, coupon is still maintained.

Late in 1922 and in early 1923 there was a further revision upward in the prices of gilt-edged securities, and the coupon rate was again lowered to five per cent. Throughout this period there has been a remarkable degree of uniformity in the prices of provincial and municipal bonds, although latterly there has been a slight adjustment to varying levels corresponding with the degree of security back of the issue. Provinces may now borrow at costs ranging between 5.15 and 5.25 per cent, on straight term offerings. The cost of municipal borrowing is slightly higher, at 5.25 to 5.40 per cent. Two provincial' issues, Nova Scotia and Quebec, were offered several months ago at par to yield the investor a return of five per cent. While the bonds were eventually sold, the price was somewhat beyond this market. and accordingly these issues did not establish a precedent for immediate observance, as subsequent issues have been floated at somewhat lower prices. Prices over the general list of government and municipal issues have been too advanced to appeal to the average or small investor, and his wants have been mainly supplied by the varied and attractive list of corporate offerings that have been floated in this market since the beginning of the year.

Banks Accumulate Funds

THE fact that the volume of new financing of the government type was comparatively small saved the situation and helped to maintain the market at its high altitude, for bonds in the hands of dealers have been consistently at a low ebb, and new issues have been in demand therefore in order to care for transient demand. Financial institutions, of course, have been large buyers of bonds, particularly the banks. Insurance companies have been looking for higher yields and have turned to mortgages, and in some instances to industrial and utility bonds. The banks, however, largely because of the relatively slow recovery of trade, found themselves with accumulations of funds on hand which they could not conveniently loan out in the ordinary channels of trade and commerce, and they have been forced to employ them otherwise in some productive manner. The gilt-edged market afforded the most convenient outlet for funds, for requisite qualities of security and marketability were supplied in ample measure. Banks have not yet been called upon to liquidate their holdings in any appreciable degree, and thus the local bond market has been relieved of the strain which has appeared across the border. - L

The trend of bond values over the past three years can be fairly accurately gauged by a study of the following table, which shows the extent of appreciation in the prices of the various Victory loan issues from the lowest point, attained November 29, 1920, following the lifting of the control of the market that had been in force for some months, and the current quotations, with yields at the various prices: K

Nov? 2*9^20 Yield Current Yield 1923 ‘ 94.60 7.60 100.55 4.38 1924 93.26 7.45 100.70 6.91 1927 94.60 6.50 103.20 4.7.0 1933 94.00 6.10 105.45 4.83 1934 89.»8 6.65 103.30 6.12 1937 94.50 6.05 -107.80 4.75

It should be pointed out that the low points attained on November 20, 1920, were not maintained for any length of time, for after the relapse following the lifting of control there was an almost immediate and healthy rebound. Incidentally current prices do not represent the highest levels attained in the succeeding interval, but fairly approximate the market average over the past three or four months, and are not far removed from the peak.

Canada’s borrowings in the first six months of the current year have been of fairly ample proportions for a season in which extraordinary financing was not necessary. The federal government was not in the market within the period, but substantial amounts were raised on provincial, municipal, and corporation account. An interesting comparison is afforded with financing in the preceding year. In the first half of the current year borrowings totalled $179,000,000, as compared with a total for 1922 of $501,000,000. Our borrowings last year therefore were at a monthly rate of over $41,000,000. The year’s total included two items of special financing for the Dominion góvermnent, these being (1) an issue of $100,000,000 five per cent, thirty year bonds floated in New York, and (2), the renewal loan issued to holders of bonds maturing December 1, 1922, and amounting to approximately $110,000,000. As both these items constituted special financing and were for refunding purposes, and therefore did not mean any addition to our volume of debt, they might properly be deducted for the sake of comparison, leaving the balance for ordinary financing at $281,000,000 for the year, which represents an average monthly rate of $22,000,000. Borrowings in the first half of the current year at $179,000,000 represent a rate of approximately $29,000,000 per month, or an average of $6,000,000 per month more than in 1922. The 1923 figures do not of course include the railroad equipment issue oí the Dominion Government financing which will be transacted later in the year.

Financing Ourselves Largely

A GRATIFYING feature of this year’s experience has been the increasing ability displayed by Canadians to supply their own requirements. Of the total of new money raised 65.09 per cent, was subscribed in Canada, as against 33.8 per cent, in the United States, and 1.11 . per cent, in Great Britain. For the six-year period from 1915 to 1920 inclusive the average percentage of bonds placed in Canada was about 59 per cent., in the United States, 38 per cent., and in Great Britain less than three per cent. In the year 1922, our borrowings at home were 46 per cent, of the total, in the United States, 53 per cent, and in Great Britain less than one per cent. There appears every likelihood that as Canada grows commercially and financially, she will continue to take care of a larger percentage of her requirements.

It does not seem probable at this time that Great Britain will re-establish herself as the premier markets for Canadian securities, a dominant position which she held before the war. In the first place the private income available for investment in Great Britain has been depleted on account of the enormous demands for government account. Furthermore with the continental nations crying for financial aid, Britain, with her more intimate knowledge of affairs, and the needs of the poverty stricken nations, will no doubt be the natural market for the major portion of such financing as may be necessary, and in any event the rates of interest involved will undoubtedly be such as to make a special appeal to the British investor who is hard pressed to meet the exacting demands of government and ' state. Undoubtedly a fair share of Canadian issues will be taken to London as soon as exchange is adjusted on a more satisfactory basis, and even now there is reported a steadily growing interest in Canadian securities of all forms. At the moment, however, the London market offers but comparatively little advantage, either over the domestic or New York markets in the matter of rates, and with exchange conditions as they are that market is effectively closed. New York will continue to absorb a large portion of our offerings, but to reiterate, there appears every likelihood that as time goes on Canada will become more and more self dependent in this respect.

Capital is a liquid substance, however, and it is impossible to put up any effective barrier to check its flow, and with Canada presenting perhaps more attractive opportunities for investment with the exception of the United States, than any other country in the world, there is bound to be a steady inflow of foreign capital for years to come. Canada was the first of any of the nations which participated in the late war to restore her exchange to parity with New York funds. While this exalted position, of our currency has not been maintained, yet the rate continues to hover in such close proximity to par, as to remove from the United States any special advantage that she formerly derived through the position of exchange. Canada’s trade is on the mend, monthly trade reports indicate a substantial growth with balances growing increasingly favorable. Furthermore bank clearings, the monthly bank reports, the condition_ of employment, all point to an improving economic situation, and are supported by reports of industrial operations throughout the Dominion. In fact all indices reflect healthy and substantial improvement, and business will no doubt derive fresh impetus from the season’s crop now ripening in the West, which promises to be the most prolific in Canada’s history. Added to this is the fact that Canada has been richly endowed with natural resources of illimitable variety, which afford scope for profitable enterprise of every kind. Both by reason of her domestic advantages, and her setting as a component part of the British Empire, Canada is bound to attract capital for one purpose or another. There has been an appreciable quickening of the movement of foreign capital into Canadian mining fields during the year. More and more, United States manufacturers are establishing branches in Canada as a means of cultivating, both * the home and Empire markets, for by this means can they take advantage of the preferential tariffs which exist for the purpose of promoting inter-empire trade.

Canada’s Debt

CANADA’S burden of debt is heavy, it is true, the direct funded issues of the Dominion and provincial governments, and Canadian municipalities running into something like $3,866,000,000. It is encouraging to note that notwithstanding the youthfulness of this nation, by far the greater proportion of this amount is held in Canada, estimated at $2,694,000,000 or 69.69 per cent. The United States has loaned us on these various accounts something like $661,000,000 or 17.09 per cent., and Great Britain $511,000,000 or 13 2Í per cent. These are impressive totals, but the security back of them is no less so. In addition to the good faith of the citizens of the Dominion, and the powers of taxation conferred upon the various subdivisions to raise revenue in sufficient ¿mounts to fully discharge interest and maturing principal of these debts, there are vast developed resources, with an estimated value of over $17,000,000,000; the national income from our commercial activities, estimated for 1921, an off year, at $5,244,000,000, and the enormous potential resources of agricultural lands, forests, minerals, fisheries and water powers, of incalculable wealth. Canada has an area of 300,000,000 acres physically suitable for agriculture. To date only one fifth of this total, or 60,000,000 acres, have been cultivated. It is evident therefore that agriculture is bound to be the foundation stone of Canada’s development ánd prosperity.

Comparatively heavy borrowings on corporation account form an interesting item in the year’s summary of bond transactions. The tendency to increased industrial activity is marked by the expansion of financing of this character, although it is to be regretted that in several instances firms made recourse to the public markets for funds with which to discharge bank indebtedness. Corporation bonds have made a wide appeal to investors on account of the relatively higher returns yielded by securities of this character as compared with bonds of the gilt-edged type. Yields on corporation bonds have ranged from slightly better than six per cent, to as high as six and three-quarters, according to the type of business represented.

In view of the comparatively high costs of financing over the past few years, a survey of Canada’s experience in the London market in the past is interesting. It may be recalled that Dominion loans are still outstanding in the London market bearing interest coupons as low as two and a half per cent. She has other loans which were obtained at three, three and a half, four and four and a half per cent, rate. Her lowest rate, two and a half per cent., was obtained on a loan of $5,000,000 floated in London in 1897, which has still twenty-four years to run. The three per cent, rate was also obtained in London at intervals from 1888 to 7894, totalling $36,000,000 with fourteen years still to run.

As for the future of the bond market it is dangerous to predict, but present indications point to a conservative appreciation of values over succeeding years.