Canadian corporate bond mutual funds have rapidly increased in number and size in recent years. Their holdings have also become riskier, increasing their exposures to credit risk, interest rate risk and liquidity risk. We also briefly discuss financial stability implications.
This note investigates whether Canadian corporate spreads and the excess bond premium (EBP) lead Canadian economic activity. Indeed, we find that corporate spreads precede changes in real gross domestic product (GDP) in Canada over the subsequent year. The EBP accounts for most of this property. Further, an unanticipated increase in the Canadian EBP forecasts a deterioration of domestic macroeconomic conditions: a 10-basis-point increase results in a fall in both GDP and consumer price index (CPI) of 0.4 per cent and 0.1 per cent, respectively, over three years.