Posthaste: Two signs foreign investors are making their way back to Canada, just in the nick of time
Foreign investors are making their way back to Canada, a welcome return after the hiatus in the first half the year.
Foreign ownership of Canadian debt hit a record high at the end of 2024 with non-residents controlling 39.5 per cent of all available Canadian debt securities.
But the start of 2025 brought turmoil when U.S. President Donald Trump launched a trade war which initially specifically targeted Canada and Mexico.
Foreign investors backed off, a cooling that lasted through the first half of the year.
Now there is evidence they are making their way back, said Warren Lovely, strategist with National Bank of Canada.
“The geopolitical picture remains murky, but we’ve nonetheless witnessed a timely re-coupling of foreign investors and Canadian debt issuers,” he wrote.
International Monetary Fund COFER data, which breaks down the composition of official foreign exchanges reserves, show that reserve managers added to their holdings of Canadian dollars in the third quarter after divesting in the first half.
The loonie’s share of allocations fell from 2.83 per cent in the fourth quarter of 2024, to 2.63 per cent in the first and second quarter of 2025. That share rose to 2.66 per cent in the third quarter.
Lovely said the Canadian dollar only represents a small piece of the overall allocated reserves, “still, the apparent return of ‘official money’ is welcome news.”
Statistics Canada’s data on international transactions also shows renewed foreign interest in Canadian debt securities, said the economist.
“Non-resident investors – which collectively cooled on Canadian government debt in the first half of the year – dipped their toes back into the GoC debt pool during Q3,” he said.
“That was welcome, since any sales to foreign investors arithmetically reduces the amount domestic investors are required to take down/hold.”
Foreign investors picked up a net $25 billion of Government of Canada debt in the third quarter or about 60 per cent of what was available. Non-residents acquired another $20 billion in October alone.
The return is timely, said Lovely.
“Canadian governments are doing some heavy lifting these days, directly supporting a still-vulnerable economy and essentially taking up slack left by cautious private sector participants,” he said. “This has resulted in non-trivial budget deficits and material borrowing needs.”
All levels of government in Canada borrowed about $50 billion in the third quarter, equivalent to more than 6 per cent of gross domestic product on an annualized basis, he said.
Canadian banks are the biggest domestic buyers. Lovely said the $64 billion increase in their holdings of Government of Canada bills and bonds this year represented almost 60 per cent of the increase in outstanding federal debt.
“There’s no shortage of government debt to go round – now and into the future – so keeping all investor types attached/engaged would seem wise,” he said.
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A sell signal has been triggered on BofA’s contrarian Bull & Bear indicator. The Bank of America meter rose from 7.9 to 8.5 this past week, placing it soundly in sell territory.
Anything above 8 is considered a bullish extreme.
Since 2002, 16 such sell signals were followed by an average loss on the S&P 500 of 1.4 per cent over the next three months.
A poll of money managers by BofA showed the same bullish trend. Investor sentiment as measured by cash level, equity allocation and global growth expectations rose to 7.4, the highest since July, 2021.
Allocation to stocks and commodities were the highest since February, 2022 and cash levels hit a record low of 3.3 per cent.
This level of optimism has been seen only eight times this century, said BofA strategist Michael Hartnett. Others include during the inflation of the subprime bubble in the early 2000s and the post-COVID boom.
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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
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