Widening credit spreads and unsettled markets, coupled with rising inflation and falling real yields, created difficult borrowing conditions in the first quarter of the year. That’s according to an analysis and results released last week by the Investment Industry Association of Canada (IIAC).

The IIAC report addresses trends in the Canadian fixed income markets for the first quarter of 2008, including the Maple bond market, issues with Libor, a post mortem of the ABCP settlement and technological changes.

When it comes to numbers however, it has not been a rosy quarter — in addition to the liquidity crisis triggered by non-bank asset backed commercial paper still playing itself out, Canada experienced its first quarter with negative GDP growth (-0.1%) in five years, which saw Bank of Canada slashing interest rates.

“Rising inflation and falling bond yields pose serious challenges to the Canadian fixed income markets,” said Ian Russell, president and CEO, IIAC. Russell remains positive however. “Markets remain confident, central banks in Canada and across global markets will take necessary action to contain inflationary pressures.”

According to the IIAC, in the first quarter of 2008, total issuance was down 18% over the final quarter of 2007, and down 10.8% compared to the same period last year to $41.4 billion. Government bond issuance fell even farther — by 22.8% over the fourth quarter from last year. Provincial and municipal bond offering volumes however tanked in Q1, down 57.3% and 83.3% respectively. Government of Canada bond issuance held on for the most part, sliding to $7.2 billion, down only 1.4%. Crown Corps buoyed the field and kept growing — financing increased 15.8% quarter of quarter, and 29.4% year over year — to $18.2 billion. Meanwhile trading volumes kept pace with last year.

Shrinking interest rates, and the week economy contributed to the declining demand for corporate bonds. Further corporate spreads reached 195 basis points, up 50 bps since the end of the previous quarter. The Maple bond market took it the worst — only $500 million was issued on four offerings — down 96.1% over the first quarter of last year. Real estate financial sectors accounted for 81.9% of the market. In June of last year the Maple bond market was poised to overshadow its closest peers the Kangaroo and Kauri bond markets in Australia and New Zealand respectively, but it has been eclipsed in turn.