While we have seen multiple headlines this week of the White House trying to get deals done in the pharmaceutical space, AI and rare earth minerals.  It’s the same game of trying to not only getting actual stakes in companies but generate capital investment in industries that Trump and his inner circle believe will pay dividends, so to speak, at the polls next year. Indeed, if we only used the stock market as a gauge for how things in the U.S. are going, one would conclude that it’s never been better. Indeed, there continue to be strong inflows into U.S. equities despite valuations that are stretched, as we discussed in this week’s conference call (click here to view the playback details).

After net selling in April, foreigners also picked up the pace of U.S. treasuries into July. The chart below shows the value of net purchases by foreigners of US treasury bonds and notes, and you can how there has been a recovery from the weakness immediately following last year’s US election and April’s tariff mania. The data for July was released on September 18th. With this recovery, the total foreign holdings of U.S. Treasuries hit a record high of $9.16 trillion in July though the regional mix has shifted. Japan and UK saw the largest net buying, while China further reduced its holdings to $730 billion.

This might appear to suggest a vote of confidence in the policy directions being taken by the White House, though this lift in U.S. security purchases has come alongside a rise in hedging activity against the American greenback. We have talked about this reduced appetite for dollars all the way back to last year and how Canadian investors in particular should be hedging their US dollar exposure as much as possible. I would suggest, however, that the international flow data released by the US Treasury Department for July that was released two weeks ago, may not reflect how foreign investors feel about the prospects for US fixed income in the wake of increasing attacks on Federal Reserve independence, a resumption of tariff attacks on trading partners and now a government shutdown.

This is not only an issue for investors looking to diversify away from the greenback, but it is something that companies looking to raise capital in the debt market need to consider. Over the decades governments, agencies and companies have been able to not only issue bonds in their local currency but in others as well, like the U.S. (Yankee bonds), Japan (Samurai bonds), and Australia (Kangaroo bonds). Depending on interest rate differentials, currency valuations and swap spreads, it might be advantageous for a company to go to another market to raise capital.

Towards the end of my tenure as head of capital market research for a prior firm, another country was emerging as a place for foreign entities to issue debt and that was good old Canada. These bonds were affectionately nicknamed “Maple bonds” and while the Canadian debt market is not as deep or liquid as the U.S. or other regions, the advance of maples was helped by Ottawa. In 2005, the federal government smartly removed what was then called the “foreign property rule”, which capped the percentage of a registered account (think RRSPs, LIRAs, RRIFs and LIFs) that an investor could sink in non-Canadian securities. This meant there was no limit on your exposure to foreign stocks, but also bonds.

Okay, so who issues debt in our maple market? Well, over the years, the list of players has expanded from global agencies like the World Bank, the European Investment Bank (EIB), Kreditanstalt fur Wiederaufbau (KfW) and Inter-American Development Bank (IADB) to U.S. companies, from Apple to Citi Group. Following the removal of the foreign property rule, issuance of maples spiked to around C$30 billion and I remember visiting with foreign central banks and investment funds at the time raising awareness of this new market. China, in particular, started to ramp up its own investment in Canadian fixed income instruments around that time. At the time, this was an opportunity for foreign investors to diversify their North American fixed income exposure, but it also gave Canadian investors the chance to add foreign debt issuers to their portfolio but stay in their home currency. The below chart shows the amount of Maple bonds outstanding by maturity year and out from 2035. As you can see, of the total outstanding of well north of $60 billion, a large amount comes due in the next three years.

I will get into how Canadian investors can invest in this segment of the market later, but let’s stick with the issuers for now. Since the advent of maples, a foreign entity would almost always hedge the proceeds of the bond issue back into either US dollars or its home currency. As a result, even with the increased in issuance there was not a major influence on the value of the Canadian dollar. If Canadian investors took a piece of the issue, there was no foreign exchange transaction. Non-Canadian investors could and did buy, and may have converted to do so, but it didn’t really move the needle.

Today, there is a structural shift emerging that is affecting global confidence in the US dollar relative to other currencies. On the one hand, you might think that it would make more sense to issue debt in US dollars since you could repay that debt later at a more favourable exchange rate (cheaper dollars). You may also think that if Trump gets his way with commanding the Federal Reserve that inflation will head higher and erode the real value of the debt you owe. But what if the appetite for US-denominated bonds falls and/or yields rise? That advantage could then fade relative issuing in a more “stable” currency. Perhaps the Loonie.

Let’s bring it back to investors, both foreign and domestic. Institutional money managers, sovereign wealth funds, and central banks are likely in the early stages (except China) of reducing their exposure to US dollar-denominated debt and the same might hold true for equities. As I have discussed with clients, Canada is a very small share of global capital markets. According to a report by RBC Global Asset Management, as of the end of 2024, Canada’s bond market represented only 3.8% of the global market. When an international investor makes a tiny shift in their allocation to US debt or equity, and re-allocates that to other jurisdictions, it can have a disproportionate impact on that jurisdiction’s market. They may not be interested in buying the debt of a Canadian government or company, but a piece of EIB paper that is denominated in Canadian dollars? Maybe so.

On the home front, investors may already be saturated in Canadian names like the federal government (on the public side) and banks (which dominate the corporate side). Why not diversify away from both, and get some foreign exposure without leaving the Canadian dollar homestead? Maple bonds definitely can deliver on that. Now, yields factor into this, as well as credit quality. What I mean to say is that just because we might want to diversify away from the U.S. to other regions in our bond portfolio, adding a bunch of Maple bonds may not always create a better total return offering. It will, however, insulate from currency volatility which could become significant in the weeks, months and quarters to come.

For most Canadian retail investors, there are essentially three ways to access the Maple bond market. You can buy bonds in primary allocations, which will be dealer dependent. They can be purchased in the secondary market as well, just like other debt instruments. In both cases, depending on the entity there might be some prospectus exemptions (accredited investors), though government-guaranteed and supranational issues will typically be open to retail investors. The other avenue is through exchange traded funds (ETFs) and mutual funds. One of the reasons we make use of exchange traded funds and mutual funds in the fixed income space is that it is more effective and efficient in most cases than trying to populate a portfolio with individual issues. The potential problem is that both vehicles may not have the exposure to Maple bonds that we want.

Thankfully, this year saw a change that helped in that regard. As of Jan 1, 2025, FTSE Russell included all newly issued Maples in the FTSE Canada Universe Bond Index and related sub-indices. Why is this important? If you are managing an ETF or mutual fund that is indexed to the Universe Bond Index, then anything that is included in that index has to be replicated in the fund tracking it. This is akin to when a company’s stock gets added to a major index and funds that are designed to mirror that index have to now buy that stock.  Even though Maple bonds represent a small portion of the universe index, there was still a boost in demand for paper at the margin. As of last week, there was just over $16 billion in new Maple bond issue since the start of the year and that surpassed the total issuance of $13 billion in 2024 and was slightly ahead of the 2023 total.

Unfortunately, there are not a lot of ETFs or funds that give us a high degree of exposure to Maple bonds, irrespective of the rule change and its impact on fund composition. In other words, you are getting the index basically with whatever share the of Maple bonds the benchmark index has. There are variations, like the universe plus Maple bonds, or short-term plus Maple bonds. I do believe, however, that as issuance improves, we may see a better offering of securities that more closely follows the Maple bond market. For Canadian investors, the Maple bond market is a rare case where global diversification and home-currency convenience meet. If the past was niche, the future is mainstream — and ignoring Maples now could mean missing one of the cleanest “non-U.S.” diversification plays available.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle