Termination of the Foreign Property Rule has not yet prompted a rush into foreign bonds by Canadian institutional investors, according to new research from Greenwich Associates. But the move is coming, the company says.

Greenwich reports that US Treasury trading volume actually declined among Canadian institutions during the 12-month period ending in April. Trading volumes in euro-denominated government bonds doubled, it notes, albeit from a modest base of $2 billion in 2005.

“Canadian institutions spent the past 12 months taking the majority of steps necessary to enter global bond markets more fully,” says Greenwich’s Toronto-based consultant Lea Hansen. “Our research suggests that investment in non-domestic fixed income will accelerate rapidly in coming months. Canadian institutions have plans to become much bigger players in foreign bonds, primarily in the U.S., but also in Europe.”

The research indicates that while 44% of Canadian fixed-income investors say they currently use U.S. Treasuries, an additional 30% now say they have plans to invest in U.S. government bonds for the first time. Canadian institutions’ presence in the European fixed-income markets is likely to grow as well. Overall, 13% of institutions said they currently use European government bonds, and another 14% expect to begin using them in the near term.

European companies have been among the most active issuers of Canadian dollar-pay foreign issue bonds, or Maple Bonds, Greenwich noted. Since the beginning of 2006, foreign issuers of Canadian dollar denominated bonds have issued over $12 billion in debt securities, nearly one third of all new issues of corporate bonds in Canada. A third of Canadian institutions say they use Maple Bonds and almost a quarter have plans to begin investing in them. “When Canadian institutions are asked to name the non-domestic fixed-income securities they plan to begin using, Maple Bonds rank second only to U.S. Treasuries,” says Hansen. “There’s tremendous bullishness on the future of this market.”

Canadian institutional fixed-income trading volume (including derivatives) grew nearly 5% from 2005 to 2006 and now tops $1 trillion, Greenwich reports. Volumes were up in most major domestic categories, including Government of Canada and provincial bonds. One of the biggest trading volume jumps occurred in asset-backed securities. Although the absolute numbers are modest, ABS trading volumes increased more than three-fold. The most active investors (those with more than $5 billion in fixed-income trading volume) were responsible for the vast majority of this increase.

The firm also found that Canadian institutions have been relatively slow to adopt electronic trading, but like foreign bond investing, this too appears to be changing. In 2005, Greenwich Associates reported that a little less than 30% of Canadian institutions conducted some of their fixed-income trading online, about the same proportion as the year before. Twelve months later, the total has increased, from 28% to 32% among all institutions. For those doing $5 billion in fixed-income trading volume, the leap has been far more dramatic — from 31% to 41%.