June 1, 2016 / 3:38 PM / a year ago

Canada bond investors favor credit as redemption cash rolls in

3 Min Read

TORONTO, June 1 (Reuters) - Canadian fixed-income fund managers say they favor corporate bonds and other securities that bear credit risk, as June's traditional heavy bond redemptions swell their war chests, but they warn they have grown more selective after a credit market rally lifted all boats since February.

The June redemptions and interest payments typically trigger a burst of new supply from issuers keen to tap the flood of cash.

Total interest and principal payments for the month are expected to rise to C$56.8 billion ($43.3 billion) this year from C$42.1 billion in June 2015, according to IFR, a Thomson Reuters service.

Portfolio managers say they favor reinvestment in credit because of concerns low government bonds yields are insufficient to compensate for interest rate risk.

"We tend to lean that way (toward credit) in general, but this market environment really makes us want to lean that way," said Tom O'Gorman, director of fixed income, Franklin Bissett Investment Management.

At Sprott Asset Management, co-chief investment officer Scott Colbourne likes the incremental yield of both investment grade and high yield corporate bonds and sees new issuance as "a good way to participate."

Growth is looking better in the United States, while Canada will benefit from a recovery in commodity prices, said Colbourne.

The Federal Reserve Bank of Atlanta's GDPNow model is forecasting U.S. growth will accelerate to 2.9 percent annualized in the second quarter. And oil has rebounded toward $50 a barrel.

Manulife Asset Management is overweight credit and confident the corporate securities it holds will come out ahead in the long-term given the spread over government yields, said Hosen Marjaee, senior managing director, Canadian fixed income.

"We also like the provinces, the majority of them are in a better shape than they have been," he added.

To be sure, a potential interest rate hike from the U.S. Federal Reserve and the Brexit vote in the U.K. could trigger risk aversion and widen credit spreads. And the fund managers said they have become more discriminating as debt security prices rallied for much of this year.

At CIBC Capital Markets, head of Canadian government credit strategy Maria Berlettano cautioned that looking for strong, creditworthy names is critical.

"We reach less hard than we were when credit was cheaper," noted Franklin Bissett's O'Gorman.

$1 = 1.3112 Canadian dollars Reporting by Fergal Smith; Editing by David Gregorio

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