Taking the reigns of a $15 billion pool of assets can be a challenge in calm financial times, but Central 1 Credit Union?s Charles Milne became chief investment officer at the member-owned organization just as market panic geared up in October amid sovereign debt concerns in Greece.
Milne became CIO following the September 30 retirement of Rowland Kelly, Central 1?s former CFO and COO (see ?Central role? – issue 1146; October 11-17).
Volatile markets have continued to impact Central 1?s balance sheet but with more than 26 years of experience in the financial sector, Milne sees the opportunities in addition to the challenges associated with the world?s latest financial crisis.
Milne shared some of his insights with Business in Vancouver following Central 1?s annual general meeting earlier this month.
What?s been the impact of Europe?s financial crisis on capital markets in Canada?
Because capital markets are interconnected, there is a ripple effect that goes on in markets outside of Europe. But you?ve seen only a little ripple [here] at this point in time.
We?re pretty far from the epicentre of what?s going on. We?re seeing some movement [up] in credit spreads. We?re seeing some corporate spreads move out. But on the whole, the tone in Canadian bond markets, where I operate, is pretty good.
How big a change in spreads are we talking about?
For example, typically an Ontario government bond is priced 30 to 40 basis points above Government of Canada bonds. As markets start to get more volatile that spreads moves out, so it costs the government of Ontario a bit more to borrow. It might now be 50 to 60 basis points.
The big-time stress was back in 2008 but we are no where near that. So, at the moment, the effect is a little ripple. If you?re a company going to [the] market to borrow, your spreads will be a little higher, but offsetting that is the fact that interest rates have come down so far.
How do these changing spreads affect Central 1?s balance sheet?
It causes volatility on our balance sheet. We hold provincial bonds and bank debt in Canada. We mark-to-market our bonds, so as these spreads move out that causes volatility in our financial income. But our intention is that we hold these mostly to maturity, so day-to-day and month-to-month fluctuations cause noise, but in the end the bonds mature.
Does the day-to-day volatility affect your job?
Sure. In markets like this one we?re extra cautious, making sure we have lots of liquidity.
When the U.S. credit rating was downgraded, was there much volatility in Canadian bond markets given how closely tied we are to the U.S.?
No, very little. The U.S. downgrade was not a real issue. I think most people still look at it and say, ?We think the U.S. has the capacity and the willingness to pay.? In fact, you?ve seen, in this kind of market, there?s a flight to quality and the place to go is still U.S. government bonds.
Are there any other reasons why there was little volatility in the Canadian markets?
I think Canada is in a very good position. Canadian banks are very well regarded. Fiscally, Canada is in pretty good shape among G20 countries. The U.S. market is so big and so liquid, that?s why people go to the U.S. to invest if they?re flying to safety. But we?ve seen a lot of interest in Canadian debt by other international institutions and investors. A lot of our debt is purchased from European, Asian and U.S. investors.
A few years ago, the flight to quality was good for Canada?s bond market. Is that still the case?
I think that is very much still the case. You see a lot of appetite from other places around the world.
Does that help Canadian business?
Yes it does. It keeps the costs of borrowing for large Canadian issuers down because you?ve got a much bigger investment base, and it keeps volatility lower because people are willing to step up to the plate and buy.
So the increase in government bond rates is a natural market reaction?
Yes. Globally, spreads move out on things in Europe or the U.S.-Canadian bonds will often follow in sympathy.
How hopeful are you that the European crisis will be resolved properly?
I think, eventually, the Europeans will get it all together and resolve things. But I think we?ll see this market volatility continue for a few more months before it hopefully, finally, sorts itself out.
Will that result in lower interest rate spreads in the capital markets?
I?d suspect that once the European situation is more resolved and investors feel more confident, you?ll see spreads, in general, go down. As the perceived level of risk goes down, you?ll see spreads start to narrow.
Having been in the financial sector since the mid-1980s, are there any commonalities that give you a perspective on the current financial crisis?
Obviously each situation is unique, but you get the same effect over and over again. Whether it?s the ?87 stock market crash or the early 1990s with the Russian and Asian financial crises, you get the same kind of thing where people fly to what they perceive to be a liquid and secure investment, which is usually U.S. government treasuries.
You see stock markets go down, you see credit spreads move out and once the crisis is resolved, everything gets back to normal. But you just don?t know how long it will take. Rowland said, ?What?s required is to have a long-term view and approach it with a certain amount of calm.? I think that?s a truism. ?
