Okay, so the Bank of Canada raised its benchmark interest rates this week, and now seems to be happy with current interest levels. The statement that accompanied the increase was interpreted to mean the bank is now done, at least for the nonce.

That has had a rather weird effect on the Canadian yield curve, as two-year bonds yields at about 4.088 per cent and five-year bonds at 4.175 per cent are now trading through the central bank's overnight rate of 4.25 per cent, which frankly, doesn't make a lot of sense to me.

Twos continue to be supported by the fact that the benchmark issue is still pretty small in size and dealers get short of it at their peril. In fact, the whole Canadian curve has a decent underlying bid caused by the relative shortage of collateral (which could be the subject of a whole column of its own). As traders like to say, "he who sells what isn't his'n, must buy it back or go to prison."

The rate hike means that funding of dealer inventories is now a touch more expensive, which means that provincial and corporate paper, with higher margin requirements than Canada bonds, is under a little pressure as dealers look to cut their inventories.

Corporate yield spreads, however, continue to remain remarkably stable. U.S. corporate bond and swap spreads have widened smartly, while domestic spreads continue to be supported by yield-hungry investors picking away at offerings. Domestic corporate bonds are starting to feel a little squishy, however. Part of that is a result of the unrelenting onslaught of Maple bond issuance (Canadian dollar-denominated issues by foreign borrowers). Most of those deals come at spreads that make domestic financial paper look a mite expensive, and since everyone is long domestic financial debt up the proverbial yin-yang, spreads of domestic financial issues are seeing a little pressure as investors sell it to buy new Maple deals.

One of the strange features of the Canadian corporate bond market is that roughly 70 per cent of it comprises banks' and other financial bonds. That helps explain the popularity of the new Maple bonds, as they offer domestic institutional investors some diversification opportunities away from the handful of domestic borrowers. Pretty much all the Maple issuance to date has been from foreign financial institutions (Bank of America, Royal Bank of Scotland, etc.), supranationals (e.g. KfW), and international dealers (Bear Stearns, Lehman, Goldman Sachs).

There's a new wrinkle in the Maple universe, however. Next week, RBC Dominion Securities is hosting a road show for Britain's National Grid PLC, one of the world's largest electric utilities. National Grid owns and operates electricity transmission and natural gas distribution grids in Britain and the U.S. They plan to spend about £12-billion ($24.8-billion) on expanding their existing businesses over the next five years, and like other big foreign borrowers, are looking at the idea of possibly diversifying their financing sources by borrowing in the Canadian market. Officially, the road show is just a chance for investors to get acquainted with the company and hear its story. Investment bankers call this a "non-deal related" presentation.

Of course, the way these things usually work is that some pension fund manager casually mentions to the hosting dealer after the presentation that he likes the credit, likes the company's story, and if they ever come to market here, he'd have an interest in buying some of the issue. If there's enough of that kind of response, a deal can emerge in a heck of a hurry. Investors generally interpret "non-deal related" to mean "non-deal related, nudge-nudge, wink-wink." Still, enough of these presentations turn out to be purely informational that the appellation continues to be used.

Anyway, the interesting thing is that if National Grid were to come to the domestic market, it would be only the second Maple deal from a non-financial borrower (Britain's Network Rail back in February was the first, and went extremely well), and certainly the first Maple utility deal. That, to me, is another sign that the Maple market has come of age, and is no longer just a novelty. The other interesting thing about a possible deal from National Grid is the effect it might have on where Hydro One bonds trade.A National Grid issue would give investors and traders something to compare Hydro One against. Hydro-Québec is a government-owned utility and so its debt trades benchmarked against Province of Quebec bonds. Hydro One, however, is sort of/kind of/supposedly a corporate issuer, not the bloated government utility that it used to be. Well, okay, it's just as bloated as it was when it was owned by the Ontario government, only now its executives get paid a lot more than they used to. Regardless, it's hard to compare Hydro One with Hydro-Québec, since the former is a "corporate" and the latter is government guaranteed. Anyway, I wouldn't be surprised to see Hydro One bond spreads widen in the wake of a National Grid Maple deal. That could make Dalton McGuinty's plans for new electric capacity for Ontario's beleaguered grid a little more expensive.

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HARRY KOZA

Harry Koza is senior Canadian markets analyst at Thomson Financial and a columnist for GlobeinvestorGOLD.com.

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